BCom 3rd Year Auditor’s Report in Auditing Notes Study Material
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BCom 3rd Year Auditor’s Report in Auditing Notes Study Material
“A report is a statement of collected and considered facts, so drawn up as to give clear and concise information to persons who are not already in possession of the full facts of the subject matter of the report.” -Lancaster
An auditor is appointed by the shareholders of a company to audit its accounts and, as such, he makes a report to them about the affairs of the company. Sometimes, the auditor is appointed by the Directors as the first auditor of a company, and in case of a casual vacancy, but still, then, he submits his report to the shareholders. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
What is an Audit Report? The auditor is required to make a report to the members of the company on the accounts examined by him and on every Balance Sheet and Profit & LOSS Account and on every other document declared by the Companies Act to be annexed to the Balance Sheet or Profit & Loss Account which are laid before the company in General Meeting during his tenure of office. Such a report is known as the Auditor’s Report. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
It is, however, the duty of the Directors to prepare the accounts for presentation to the auditor. The manner in which these accounts are to be approved by the Directors is laid down in section 134 of the Companies Act.
Importance of Auditor’s Report to Shareholders
A beneficiary of shareholders. As stated earlier, an auditor is the agent of the shareholders who have virtually no knowledge of the material facts about the affairs of the company. The chief value of the Auditor’s Report lies in its check on the accuracy of the figures presented, though, of course, it does not add anything to the information disclosed.
The auditor is required to conduct a sufficient examination of the books and other records including the Balance Sheet and Profit & Loss Account. On the basis of this scrutiny, he makes a report to the members of the company and thus, acquaints them with the true and fair state of the company’s affairs. Hence, the auditor is appointed for their benefit and not for the benefit of the Directors.
A watch-dog-not a blood-hound. An auditor is not expected to guarantee the accuracy of every detail of the company’s books. He cannot bring all the errors and fraud to light and act against those who are found guilty of fraudulent manipulation. He is a watchdog and not a blood-hound. His duty is simply to make a report to the members whether the company’s financial position is truly exhibited by the Balance Sheet and Profit & Loss Account. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
The Companies Act has specifically mentioned the duties of an auditor. They are in no case subject to anything which the members of the company may agree or the Articles may prescribe.
Contents of the Audit Report
According to section 143 of the Companies Act, 2013, the Auditor’s Report shall state:
(1) “Whether in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view :
(i) in the case of the Balance Sheet, of the state of the company’s affairs as at the end of its financial year; and
(ii) in the case of the Profit and Loss Account, of the profit or loss for its financial year.”
Explanation. This reveals a set of two duties to be performed by the auditor. On the one hand, he has to certify that the accounts give the information required by the Companies Act, 2013 in the manner so required, and on the other hand, he has to declare that the accounts give a true and fair view of the company’s affairs and its profit or loss for its financial year.
These are two important duties of an auditor. He must ascertain that the information as required by Schedule III has been disclosed in the Balance Sheet and the Profit & Loss Account. So far as his second duty relates, he has to certify that the accounts reveal a true and fair view of the company’s affairs. The Auditor’s Report shall also state:
(2) “Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit.”
Explanation. The Act has empowered the auditor to inspect all the books, accounts, and vouchers of the company at all times whether they are kept at the Head Office of the company or elsewhere and the auditor shall be entitled to require from the officers of the company such information and explanations as he may think necessary for the performance of his duties as an auditor.
What type of information and explanations the auditor thinks necessary to obtain from the officers of the company will depend upon the circumstances of a particular case. He may rely on them if he gets them from the responsible officers of the company.
(3) “Whether in his opinion, proper books of accounts as required by law have been kept by the company so far as appears from the examination of those books and proper returns adequate for the purpose of his audit have been received from branches not visited by him.”
Explanation. Here, again, a company is required to keep proper books of accounts as prescribed by the Act and the auditor should, therefore, report specifically whether it has been done or not. In case of non-compliance, he should qualify his report.
Secondly, he should confirm and report that proper returns are being submitted by the branches and that these returns are adequate for the purpose of his audit. This provision is applicable to those branches which have not been visited by him.
(4) About branch office accounts. “Whether the report on the accounts of any Branch Office audited by a person other than the company’s auditor has been forwarded to him and he has dealt with the same in preparing the Auditor’s Report.”
Explanation. Further, the auditor should confirm that the accounts of any Branch Office which have been audited by a person other than the company’s auditor, the report of such an auditor has been forwarded to him.
He has to state clearly that he has taken full note of the said report in preparing his own report.
(5) Accounts in agreement with books of accounts. “Whether the company’s Balance Sheet and Profit & Loss Account dealt with by the report are in agreement with the books of accounts and returns.”
Explanation. Lastly, he has to confirm in his report whether the Balance Sheet and Profit & Loss Account of the company is in full agreement with its books, accounts, and returns.
This needs no comment. In every business, the final accounts are prepared in accordance with the books of accounts, returns, etc. The auditor of every company is required specifically to mention this fact in his report that it has been actually done.
(6) Adherence to Accounting Standards. “Whether in his opinion, the profit & loss account and balance sheet comply with the accounting standards.
“Accounting Standards” are to be recommended by the Institute of Chartered Accountants of India as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards.
SA 700 requires the use of specific readings.
(7) About financial transactions having adverse effects on the company. Observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company.
(8) Whether any director is disqualified from being appointed as a director.
(9) Any qualification, reservation, or adverse remark relating to the maintenance of accounts and other matters connected therewith.
(10) Internal controls. Whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls.
(11) Other prescribed matters. Such other matters as may be prescribed.
(12) Reasons for the adverse report. Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor.
Audit of Government Companies. In the case of a Government company, the Comptroller and Auditor General of India appoints the auditor and directs such auditor in the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor General of India.
Practically, it is rather very difficult for an auditor to report against the Directors of the company. But after all, it is his responsibility to submit his correct report to the Shareholders whose interests he has to safeguard. This is why an auditor should be prudent, tactful, and courageous. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
Signature on Audit Report
Section 145 provides that only the person appointed as auditor of the company, or where a firm is so appointed, only a Partner in the firm practicing in India, can sign the Auditor’s Report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
Types of Auditor’s Reports
The Auditor’s Report may be of two types: (1) a Clean or Unqualified Report, and (2) a Qualified Report
(1) Clean or Unqualified Report.
A clean or unqualified report is one in which the auditor does not insert any qualification, modification, or reservation.
If he finds it necessary to do so, he must state the reasons for it. The Companies Act lays down certain questions that the auditor of a company must answer in his report to the members of the company on the accounts examined by him and on every Balance Sheet and Profit and Loss Account and on every other document declared by law to be annexed to the Balance Sheet or the Profit & Loss Account which are laid before the company in General Meeting during his tenure of office.
Where any of these questions is answered positively or without qualification, the auditor has to submit a clean or unqualified report. It is so done by him when he finds the accounts exhibiting a true and fair view of the state of the company’s financial affairs.
(2) Qualified Report.
A qualified report is one in which the matters are answered in the negative in full or in part and, as a result, the auditor has to state the reasons for such qualifications or reservations.
Before giving any qualifications, the auditor should note the following:
- For which item, is it necessary to qualify his report?
- Whether the auditor is not satisfied with a particular matter of the company or he is unable to express his proper opinion on a particular matter in the absence of some adequate information?
- Whether certain matters are so important that they affect the true and fair presentation of the affairs of the company?
- Whether the matter relating to the qualification is concerned with the violation of an important provision of the Companies Act, 2013.
He is expected to report to the shareholders of the company the violations or contraventions of the provisions of the Companies Act, 2013 and other rules in regard to the working of a company.
Examples of qualified reports. Some examples are given below:
(a) Inadequate or no provision of depreciation on assets;
(b) Incorrect valuation of Stock-in-trade;
(c) Insufficient provision for bad and doubtful debts;
(d) Disclosure of the value of raw materials consumed not properly made;
(e) Wrong treatment of a transaction in the accounts;
(f) Non-receipt of the report for audit of branch accounts:
(g) Any other contravention of laws or procedural mistakes.
As a matter of fact, it is the sole responsibility and discretion of the auditor about any fact together with the reasons why it is not possible for him to give an answer to such questions. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
SPECIMEN OF AUDITOR’S REPORT
To the Members of XYZ Company Limited
1139, Meghdoot, Nehru Place,
Report on the Audit of the Standalone* Financial Statements
We have audited the standalone financial statements of XYZ Company Limited (“the Company”), which comprise the balance sheet as of 3rd March, 20XX, the statement of Profit and Loss, (statement of changes in equity), and the statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information (in which are included the Returns for the year ended on that date audited by the branch auditors of the Company’s branches located at (mention location of branches). (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements given the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at March 31, 20XX, and profit/loss, (changes in equity) and its cash flows for the year ended on that date. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
Basis for Opinion
We have conducted our audit in accordance with the Standards on Auditing (SAs) specified under section 143(10) of the Companies Act. 2013. Our responsibilities under those Standards are further described in the Auditor’s Responsibilities for the audit of the Financial Statements section of our report. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India together with the ethical requirements that are relevant to our audit of the financial statements under the provisions of the Companies Act, 2013 and the Rules thereunder and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Main audit matters are those matters that, in our professional judgment, were of the most significance in our audit of the financial statements of the period in question. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Management’s Responsibility for the Standalone Financial Statements
XYZ Company’s Board of Directors is responsible for the matters stated in section 134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of these standalone financial statements that give a true and fair view of the financial position, financial performance (changes in equity)’ and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the accounting Standards specified under section 133 of the Act.
This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for the safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities: selection and application of appropriate implementation and maintenance of accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation, and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statement that gives a true and fair view and is free from material misstatement, whether due to fraud or error.
Management is responsible for preparing the financial statements for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concerned and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative, but to do so.
The Board of Directors is also responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurances about whether the financial statements as a whole are free from material misstatement, which may be due to fraud or error. This is the basis of the issue or our auditor’s report that includes our opinion. Reasonable assurance is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material individually or in the aggregate, they could reasonably be expected to influence t economic decisions taken by users on the basis of these financial statements.
We did not audit the financial statements/information of four branches included in the standalone financial statements of the Company whose financial statements/financial information reflect total assets of as 31st March, 20XX and the total revenue of Rupees for the year ended on that date, as considered in the standalone financial statements/ information of these branches have been audited by the branch auditors whose reports have been furnished to us, and our opinion in so far as it relates to the amounts and disclosures included in respect of branches, is based solely on the report of such branch auditors. Our opinion is not modified in respect of matters relating to branches.
Report on Other Legal and Regulatory Requirements
As required by the Companies(Auditor’s Report) Order, 2016 (“the Order”), issued by the Central Government of India in terms of sub-section (11) of section 143 of the Companies Act, 2013, we give in the Annexure a statement on the matters specified in paragraphs 3 and 4 of the Order, to the extent applicable. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
As required by Section 143(3) of the Act, we report that:
(a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
(b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books (and proper returns adequate for the purposes of our audit have been received from the branches not visited by us.)
(c) (The reports on the accounts of the four branch offices of the Company audited under Section 143(8) of the Act by branch auditors have been sent to us and have been properly dealt with by us in preparing this report.]
(d) The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow Statement dealt with by this Report are in agreement with the books of account (and with the returns received from the branches not visited by us).
(e) In our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014.
(f) On the basis of the written representations received from the directors as of 31st March, 20XX taken on record by the Board of Directors, none of the directors is disqualified as on 31 March, 20XX from being appointed as a director of Section 164(2) of the Act.
(g) Adequacy of internal financial controls over financial reporting of the Company in place and the operating effectiveness of such controls, was satisfactory. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
Central Government’s Order about Audit Report
The Central Government after consultation with Committee constituted under section 143(11) of the Companies Act, 2013 has issued the Companies (Auditor’s Report) order, 2016. According to this order, the following matters have to be included in the audit report.
The order applies to every company including a foreign company but does not apply to a banking company, insurance company, one-person company, small company, or to private companies which are subsidiaries or are holding companies of a public company having a Specified amount of capital or borrowings, etc. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
Matters to be included in the Auditor’s Report: Paragraph 3 of the Order requires the auditor to include a statement in the auditor’s report on the following matters, namely:
(i) (a) Particulars of fixed assets. Whether the company is maintaining proper records showing full particulars, including quantitative details and the situation of fixed assets:
(b) whether these fixed assets have been physically verified by the management at reasonable intervals: whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account:
(c) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof;
(ii) whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account:
(iii) Grant of loans whether the company has granted any loans, secured to companies, or firms. Limited Liability Partnerships or other parties:
(a) whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest;
(b) Whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular
(c) If the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;
(iv) About loans etc. In respect of loans, investments, guarantees, and security whether provisions of sections 185 and 186 of the Companies Act, 2013 have been complied with If not, provide the details thereof.
(v) About deposits. In case the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act, 2013 and the rules framed there under, where applicable, have been complied with? If not, the nature of such contraventions be stated;
(vi) Cost records. Where maintenance of cost records has been specified by the Central Government and whether such accounts and records have been so made and maintained. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
(vii) Depositing statutory dues. Whether the company is regular in depositing undisputed statutory dues including provident fund, employees state insurance, income tax, sales tax, service tax, the duty of customs, the duty of excise, value-added taxes, and any other statutory dues with the appropriate authorities. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
(viii) Default in repayment of loans etc. Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, Government, or dues to debenture holders? If yes, the period and the amount of default to be reported in case of defaults to banks, financial institutions, and Government, lender-wise details to be provided)
(ix) Proper use of money raised by share issue etc. Whether money was raised by way of an initial public offer or further public offer (including debt instruments) and term loans were applied for the purposes for which those are raised. If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported;
(x) Fraud by officers etc. Whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved are to be indicated:
(xi) Payment of managerial remuneration. Whether managerial remuneration has been paid or provided in accordance with the law;
(xii) Related party transactions. Whether all transactions with the related parties are in compliance with provisions of the company law.
(xiii) Preferential allotment of shares etc. Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of section 42 of the Companies Act, 2013 has been complied with and the amount raised has been used for the purposes for which the funds were raised.
Reasons to be stated for Unfavourable or Qualified Answers. Where the answer to any of the questions referred to above is unfavorable or qualified, the auditor shall also state the basis for such unfavorable or qualified answer, as the case may be.
In big companies and corporations, the practice of appointing Chartered Accountants as joint auditors is quite common. A joint audit implies pooling together the resources and expertise of more than one firm of auditors to do the work of auditing. It is done to accomplish the audit word in the given time period. In such a situation the Auditors divide the work among themselves and each auditor is responsible only for the work allocated to him. (BCom 3rd Year Auditor’s Report in Auditing Notes Study Material)
BCom 3rd Year Auditor’s Report in Auditing Notes Study Material