Revised Reporting Requirements for Audits

1. Revised Reporting Requirements for Audits By C.A. Deepak Rindani

2. Auditing Standards of I.C.A.I. • Earlier known as “Auditing and Assurance Standards” (AAS) • Now referred to as “Standards on Auditing” (SA) – effective from 1st April 2008

3. New/Revised Auditing Standards

5. SA 200 – 299 General Principles and Responsibilities

8. SA 300 – 499 Risk Assessment and Response to Assessed Risks

10. SA 500 – 599 Audit Evidence

13. SA 600 – 699 Using the Work of Others

14. SA 700 – 799 Audit Conclusions and Reporting

16. SA 800 – 899 Specialized Areas

17. Audit Report from F.Y. 2012-13 • New/Revised Standards on Audit (“SAs”):- (Relevant for today’s discussion)

18. Two Broad Categories of Reporting Framework • Fair Presentation Framework : Auditor gives True & Fair Report under this Framework • Compliance Framework : Auditor reports on compliance with specific applicable laws or rules and regulations.

19. Title of Auditor’s Report

20. Addressee

21. Audit Report- Introductory Paragraph • Audit Entity’s identity • Financial Year (Period) • Title of Financial Statements (Balance Sheet, Statement of Profit & Loss) • Summary of Significant Accounting Policies & • Other explanatory information

22. Management’s Responsibility Paragraph • Auditor to describe Management’s Responsibility under separate paragraph- - for preparation of Financial Statement and - existence of relevant Internal Control

23. Auditor’s Responsibility Paragraph • Auditor’s Responsibility is to express opinion on Financial Statement • Auditor to follow Standards on Auditing issued by I.C.A.I.

24. Report on Other Legal and Regulatory Requirements • Reporting on matters that are supplementary to auditor’s responsibility • For e.g., reporting under CARO or for NBFCs as required by R.B.I., etc. • Reporting as per Sec. 227(3) of Companies Act - 1956

25. Miscellaneous • Overall presentation of Financial Statement to show whether it gives True & Fair view • Specific requirements of applicable law to be followed, such as Form 3CB, Sec. 44AB of I.T. Act - 1961

26. Factors for Forming Audit Opinion • Sufficient Appropriate Audit Evidence (SA – 450 & SA – 500 to 599) • Whether Misstatements are Material (SA -450) • Evaluation of Accounting Polices and Estimates Whether Statements give Fair Presentation

27. Type of Audit Opinion in Audit Report • Unmodified Opinion : - If Auditor concludes that Financial Statements are in conformity with the factors referred to earlier in slide no. 29

28. Type of Audit Opinion in Audit Report • Modified Opinion : (in following two situations) • If statements as a whole are not free from material misstatements • When auditor is not able to obtain required audit evidence

29. SA 705 - Modified Opinion • Qualified Opinion • Adverse Opinion • Disclaimer of Opinion

30. Which Opinion to give – determining factors • Inappropriate selection of Accounting Policies • Absence of Fair Presentation of Financial transaction in Financial Statements • Absence of Appropriate Disclosures

31. Not obtaining sufficient and appropriate audit evidence • Due to circumstances records not available (destroyed, seized etc.) • Due to timing of audit ( such as audit carried out after stock taking is over) • Auditor prevented by management • Absence of explanations by management

32. Give Qualified Opinion if : • Matters in audit are Material but not Pervasive • Pervasive effects are such in judgment of auditor that affect not a specific element but affect substantial portion of Financial Statements and are fundamental to disclosure in or understanding of statements

33. Manner of giving Qualified Opinion Except for the effects of the matter(s) described above in the basis for opinion para, the financial statements give a true and fair view…….

34. Give Adverse Opinion if : • Financial Statements are materially misstated with pervasive effects. • Manner of giving Adverse Opinion: In the auditor’s opinion, because of the significance of the matters described in the basis for opinion para above, the financial statements do not give a true and fair view……

35. Give Disclaimer of Opinion if : • There is material as well as pervasive inability to obtain required audit evidence • Manner of giving Disclaimer Opinion: “Because of the significance of the matter(s) described in the ‘Basis for Declaimer of Opinion para’, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and accordingly, the auditor does not express an opinion on Financial Statements”.

36. Text of Independent Auditor’s Report (SA -700(R)) To the Members of ABC Company Limited We have audited the accompanying financial statements of ABC Company Limited (“the Company”), which comprise the Balance Sheet as at March 31, 2013, and the Statement of Profit and Loss and Cash Flow Statement for the year

37. then ended, and a summary of significant accounting policies and other explanatory information. Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956 (“the Act”). This responsibility includes the design, implementation and maintenance of internal control relevant to the

38. the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the

39. financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances.

40. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In our opinion and to the best of our information and according to the explanations given to us, the financial statements give the information required

41. 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: • in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2013; • in the case of the Profit and Loss Account, of the profit/ loss for the year ended on that date; and • in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

42. As required by section 227(3) of the Act, we report that: • …….. • …….. • …….. • …….. • …….. • Since the Central Government has not issued any notification as to the rate at which the cess is to be paid under section 441A of the Companies Act, 1956 nor has it issued any Rules under the said section, prescribing the manner in which such cess is to be paid, no cess is due and payable by the Company.

43. For XYZ and Co. Chartered Accountants Firm’s Registration Number Signature (Name of the Member Signing the Audit Report) (Designation) Membership Number Place of Signature: Date:

44. ILLUSTRATIONS AS PER SA 705 • Inventories are misstated.The misstatement is deemed to be material but not pervasive to the financial statements. The audit opinion is qualified for the misstatement. • Basis For Qualified Opinion: The Company’s inventories are carried in the Balance Sheet at Rs. XXX. Management has not stated the inventories at the lower of cost and net realisable value but has stated them solely at cost, which constitutes a departure from the Accounting Standards referred to in subsection (3C) of section 211 of the Act.

45. The Company’s records indicate that had management stated the inventories at the lower of cost and net realisable value, an amount of Rs. XXX would have been required to write the inventories down to their net realisable value. Accordingly, cost of sales would have been increased by Rs. XXX, and income tax, net profit and shareholders’ funds would have been reduced by Rs.XXX, Rs. XXX and Rs. XXX , respectively. • Qualified Opinion: In our opinion and to the best of our information and according to the explanations given to us,

46. except for the effects of the matter described in the Basis forQualified Opinion paragraph, the financial statements give 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.

47. 2. The auditor was unable to obtain sufficient appropriate audit evidence regarding an investment in a foreign affiliate. The possible effects of the inability to obtain sufficient appropriate audit evidence are deemed to be material but not pervasive to the financial statement. The audit opinion is qualified for the misstatements.

48. Basis For Qualified Opinion: ABC Company Limited’s investment in XYZ Company, a foreign associate acquired during the year and accounted for by the equity method, is carried at Rs. XXX in the Balance Sheet as at March 31, 20XX, and ABC’s share of XYZ Company’s net income of Rs. XXX is included in ABC Company Limited’s income for the year then ended.

49. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Company Limited’s investment in XYZ Company as at March 31, 20XX and ABC Company Limited’s share of XYZ Company’s net income for the year because we were denied access to the financial information, management, and the auditors of XYZ Company. Consequently, we were we were unable to determine whether any adjustments to these amounts were necessary.

50. Qualified Opinion: In our opinion and to the best of our information and according to the explanations given to us, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Act in the manner so required and give true and fair view in conformity with the accounting principles generally accepted in India.