SA 700 (revised) forming an opinion and reporting on financial statements
Scope of SA 700: “Forming an Opinion and Reporting on Financial Statements”,
Deals with the content of auditor’s report.
Deals with the auditor’s responsibility to form an opinion on the financial statements.
Need of SA 700:
- Aimed to balancing global consistency and comparability in auditor reporting.
- To increase the value of audit report by making the information provided in the auditor’s report more relevant to users.
- To promotes consistency in the auditor’s report,
- To Promote the user’s to understanding and identify unusual circumstances when they occur.
Objective of the auditor as per SA 700 (Revised):
- To form an opinion on the financial statements based on audit evidence obtained; and
- To Express Opinion on Financial Statement through a written report known as audit report.
Forming of an opinion:
Auditor form opinion based on below conclusion
- Whether financial statements are prepared in accordance with the applicable financial reporting framework.
- Whether financial statements as a whole are free from material misstatement,
- Whether financial statements as a whole are free from fraud or error.
- Whether sufficient appropriate audit evidence obtained.
Evaluations by the Auditor:
Auditor shall evaluate whether the financial statements are prepared in accordance with the requirements of the applicable financial reporting framework.
While Evaluating Auditor should consider:
Qualitative aspects of entities accounting practices:
- Auditor should evaluate Judgements made by the Management about the amounts and disclosures in the financial statements.
- Auditor should evaluate if there is any possibility of bias or lack of neutrality in management’s judgements
- If there is Lack of neutrality or bias in management’s judgment, Auditor may conclude that financial statements as a whole to be materially misstated.
- Indicators of a lack of neutrality include the following:
- Selective correction of misstatements brought to management’s attention during
the audit.
Example: Correcting misstatements which increasing earnings, but not correcting misstatements which decreasing earnings.
- Management bias in making of accounting estimates.
- Frequent changes in accounting policies without proper reason
Specific evaluations while forming opinion by the auditor:
Whether financial statements disclose significant accounting policies.
Whether Accounting policies selected and applied are consistent with applicable financial reporting framework
Whether Accounting estimates made by management are reasonable.
Whether Information presented in financial statements is relevant, reliable, comparable, and understandable.
Whether Terminology used in the financial statements, are appropriate.
Evaluations in case of fair presentation framework:
Whether Financial statements are prepared & presented in accordance with a fair presentation framework, which include notes to FS.
Form of Opinions [Types]:
Unmodified Opinion:
Auditor shall express unmodified opinion
When auditor concludes financial statements are free from material misstatement and financial statements are prepared, in accordance with applicable financial reporting framework.
Modified Opinion:
Auditor shall express modified opinion
When auditor concludes that he obtained sufficient appropriate audit evidence, that the financial statements as a whole are not free from material misstatement or
When auditor unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatements.
Auditor shall modify the opinion in the auditor’s report in accordance with SA 705.
Contents / elements of auditor’s report for audit conducted as per SA’s 700:
Title
Addressee
Auditor’s Opinion
| Applicable as per therelevant standard |
Basis for Opinion
Material Uncertainty related to Going Concern (SA 570)
Key Audit Matters (SA 701)
Emphasis of Matter Paragraph (SA 706)
Other Matter Paragraph (SA 706)
Responsibilities of management for the Financial Statements.
Auditor’s Responsibilities for the Audit of the Financial Statements.
Other Information Para (SA 720)
Report on Other Legal and regulatory requirements / Other Reporting Responsibilities.
Signature of the Auditor.
Place of Signature. [Ordinarily the city where the audit report is signed]
Date of the Auditor’s Report (On / After Date of Approval of Financial statements)
UDIN (Unique Document Identification Number w.e.f.1st July, 2019)
Detailed explanation for above elements:
Title: “Independent Auditor’s Report,”
Addressee: Auditor’s report is normally addressed to those for whom the audit report is prepared, often either to the shareholders or to those charged with governance.
Auditor’s Opinion:
Auditor’s Opinion is the First section of the auditor’s report, shall have the heading “Opinion.”
State the entity whose financial statements have been audited
State that the financial statements have been audited.
State the title of financial statements.
Refer to notes & significant accounting policies and
Specify the date or period covered by the financial statement.
Basis for Opinion:
Next section is Basis for Opinion section, shall have the heading “Basis for Opinion”:
Statement indicating auditor’s responsibilities under the SAs.
States that the audit was conducted in accordance with Standards on Auditing.
States that the auditor is independent entity and fulfilled other ethical responsibilities.
States that the auditor obtained sufficient and appropriate audit evidence to provide a basis for opinion.
Going Concern SA 570 (Revised): Refer Chapter 5
Key Audit Matters SA 701: Refer below
Other information SA 720 (Revised):
Where applicable, the auditor shall report in accordance with SA 720 (Revised).
Responsibilities of Management for the Financial Statements:
As per SA 210: Refer Chapter: 3
i. To prepare Financial Statement as per Applicable Financial Reporting Framework (AFRFW)
ii. Prepared Financial Statement free from Material misstatement, Frauds & Error.
iii. To design and implement necessary internal control
.
Auditor’s responsibilities for the audit of the financial statements:
Primary responsibilities:
To Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
To Issue an auditor’s report that includes auditor’s opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee assurance.
Additional Responsibilities under SA’s:
State that, in accordance with SAs, the auditor exercises professional judgement and maintains professional skepticism throughout the audit.
Describe an audit by stating auditor’s responsibilities are:
To identify and assess the risks of material misstatement of the financial statements,
To obtain an understanding of internal control relevant to the audit in order to design audit procedures.
To evaluate the appropriateness of accounting policies & accounting estimates and related disclosures made by management.
To evaluate the overall presentation, structure and content of the financial statements.
To conclude the appropriateness of management’s use of the going concern.
When SA 600 applies, Describe the auditor’s responsibilities in a group audit engagement by stating, the division of responsibility for the financial information
Communication Related Responsibilities:
State that auditor communicates with those charged with governance regarding,
Planned scope and timing of the audit
Significant audit findings,
Significant Deficiencies in internal control
Location of the description of the auditor’s responsibilities section:
Within the body of the auditor’s report.
Within an appendix to the auditor’s report,
By a specific reference to website within the auditor’s report to the location of such a description.
12. Other Reporting Responsibilities:
a. Report on legal and regulatory requirements:
In addition to the auditor’s responsibilities under the SAs of Content no.10,
Other reporting responsibilities shall be addressed in this section Content no.12 Shall have the heading “Report on Other Legal and Regulatory Requirements”
b. Report on audit of financial statements:
In Other Reporting Responsibilities section matter related to SAs and also matter related to Other Reporting Responsibilities are presented in the same section then auditor should clearly differentiate the other reporting responsibilities from the reporting required by SAs.
The section that talks about the SAs should have a title“Report on the Audit of the Financial Statements.
“Report on Other Legal and Regulatory Requirements” must come after the section “Report on the Audit of the Financial Statements.”
13. Signature of the Auditor:
Individual cap: Auditor’s report shall be signed by the auditor (engagement partner) in his personal name.
Firm [SPF / PF / LLP]: Auditor’s report is signed by the personal name of the auditor and in the name of audit firm.
MRN & FRN: Partner/Proprietor signing the audit report also needs to mention the membership number assigned by the Institute of Chartered Accountants of India and also include the registration number of the firm.
14. Place of signature: Location of the city where the audit is signed
15. Date of the auditor’s report:
The auditor’s report shall be dated not earlier than:
Date on which the auditor has obtained sufficient appropriate audit evidence to form opinion AND
Approval of F/S: from those who are responsible to prepare the financial statements
Auditor’s responsibility for events and transactions after the date of the auditor’s report is addressed in SA 560.
16.UDIN
ICAI implemented innovative concept of UDIN i.e., Unique Document Identification Number.
All Certificates were made mandatory with effect from 1st February, 2019 as per the Council decision taken at its 379th Meeting held on 17th – 18th December, 2018.
Chartered Accountants having full-time Certificate of Practice can register on UDIN Portal and generate UDIN.
Accordingly, an auditor is required to mention the UDIN with respect to each audit report being signed by him, along with his membership number.
SA 705 Modifications to the opinion in the Independent Auditor’s Report
A. Scope of SA 705:
SA 705 comes when auditor concludes, Modification to the auditor’s opinion on the financial statements is necessary.
SA 705 also deals with form and content of the auditor’s report when auditor expresses modified opinion.
B. Circumstances when auditor express modified opinion:
When auditor concludes that he obtained sufficient appropriate audit evidence that the financial statements as a whole are not free from material misstatement
or
When auditor unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
C. Types of modified opinions:
There are 3 types of modified opinions, namely:
i. Qualified Opinion: Auditor shall express qualified opinion:
when auditor obtained sufficient appropriate audit evidence to concludes that misstatements, individually or in aggregate to the financial statements, are material, but not pervasive,
or
when auditor unable to obtain sufficient appropriate audit evidence to concludes that possible effects of undetected misstatements on the financial statements, if any, could be material but not pervasive.
ii. Adverse Opinion: Auditor shall express an adverse opinion
when auditor obtained sufficient appropriate audit evidence to concludes that misstatements, individually or in aggregate to the financial statements, are material and pervasive.
iii. Disclaimer of Opinion: Auditor shall disclaim an opinion
when auditor unable to obtain sufficient appropriate audit evidence to concludes that possible effects of undetected misstatements on the financial statements, if any, could be material and pervasive.
D. Definition of Pervasive:
Auditor Judgment are not confined(*Limited) to specific elements, accounts or items of the financial statements.
If so confined,
a. Represent or could represent a substantial proportion of the financial statements
or
b. In relation to disclosures, are fundamental to users’ understanding of financial statements.
E. Which types of opinion is appropriate the below table illustrates:
| Nature of matter | Case | MMS Exist? | Pervasive? | Opinion |
| Sufficient and appropriate audit evidence Obtained | A | No | NA | Unqualified Opinion |
| B | Yes | No | Qualified Opinion | |
| C | Yes | Yes | Adverse Opinion | |
| Situation | Case | Is it material? | Is the possible Effect pervasive? | Opinion |
| Sufficient and appropriate evidence NOT Obtained | B | Yes | No | Qualified Opinion |
| C | Yes | Yes | Disclaimer Opinion |
F. Consequence of an inability to obtain sufficient appropriate audit evidence due to management-imposed limitation on the scope of audit after accepting the audit engagement by Auditor:
Request the management to remove the limitation:
a. Management removes the limitation => Proceed with audit procedure
b. If management refuses to remove the limitation, Auditor shall communicate the matter to those charged with governance and perform alternative audit procedures to obtain sufficient appropriate audit evidence.
c. Still the auditor is unable to obtain sufficient appropriate audit evidence:
Auditor shall conclude:
i. Possible effects of undetected misstatements on financial statements, could be material but not pervasive, then auditor shall qualify the opinion
or
ii. Possible effects of undetected misstatements on financial statements, could be both material and pervasive, then auditor shall:
- Withdraw from the audit, communicate withdrawal to those charged with governance
- If withdrawal from the audit is not practicable or possible, disclaim an opinion on the financial statements.
G. Reference in audit report in case of modified opinion:
When auditor express modifies opinion on the financial statements, in addition to the specific elements required by SA 700 (Revised):
Auditor shall additionally include: Opinion heading & Basis for opinion para
a. In case of Qualified Opinion:
Qualified Opinion
Basis for Qualified Opinion
b. In case of Adverse Opinion:
Adverse Opinion
Basis for Adverse Opinion
c. In case of Disclaimer Opinion:
Disclaimer Opinion
Basis for Disclaimer Opinion
H. Inside basis for opinion section, describe the matter giving rise to modified opinion.
Description to Basis for Opinion para in case of modified opinion:
i. MMS in F/S – Quantify:
Material misstatement of financial statements relates to specific amounts in the financial statements is practically quantifiable, then auditor shall include description and quantification of the financial effects of misstatement.
ii. Unable to Quantify:
Material misstatement of financial statements relates to specific amounts in the financial statements is not practically quantifiable, then auditor shall give explanation, how the disclosures is misstated.
iii. MMS by way of non- Disclosure:
Material misstatement of financial statements relates to non-disclosure of information required to be disclosed, then auditor shall:
– Discuss the non-disclosure with those charged with governance.
– Describe the nature of the omitted information; and
– Unless prohibited by law or regulation, include the omitted disclosures, if practically possible.
iv. Inability to obtain evidence:
Reasons for Inability to obtain sufficient appropriate audit evidence shall include in the Basis for Opinion section.
As per SA 700 (Revised).
When auditor expressed disclaims an opinion on the financial statements,
a. Then auditor’s report shall not include the following elements:
i. A reference to the section of the auditor’s report where the auditor’s responsibilities
are described; and
ii. A statement about whether audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
iii. Key Audit Matters section in accordance with SA 701.
b. Then auditor’s report shall include only the following statement that:
i. Auditor’s responsibility to conduct audit on financial statements in accordance with Standards on Auditing and to issue an auditor’s report;
ii. However, because of the matter(s) described in the Basis for Disclaimer of Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to provide basis for an audit opinion on the financial statements; and
iii. Auditor independence and other ethical responsibilities required by SA 700 (Revised).
SA 706 Emphasis of matter paragraphs (EOMP) and other matter paragraphs (OMP) in the independent auditor’s report
A. Definition/ Scope / Objective as per SA 706 (Revised):
Objective of the auditor to formed opinion on the financial statements,
SA 706 deals with additional communication in the auditor’s report, when it is important as per auditor’s judgement:
i. EOMP: To draw users’ attention to matter or matters presented or disclosed in the financial statements; or
ii. OMP: To draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements.
B. Usage of Emphasis of Matter Paragraph:
i. Emphasis of Matter paragraph is used to draw user’s attention related to F/S’ s matters, which is important as per auditor’s judgment.
ii. Auditor would not require to modify the opinion per SA 705 (Revised) to use Emphasis of Matter paragraph.
iii. When SA 701 applies, matter other than key audit matter can communicate using Emphasis of Matter paragraph.
Examples when EOMP can use:
a. Uncertainty relating to future outcome of possible litigation or regulatory action.
b. Significant subsequent event that occurs after the date of the financial statements
But before the date of auditor’s report.
c. Early application (where permitted) of a new accounting standard
C. Manner of Presentation of Emphasis of Matter:
i. Include Emphasis of Matter paragraph as a separate section of the auditor’s report contain heading “Emphasis of Matter”;
ii. Emphasized (highlighted) the matter by giving reference to information presented or disclosed in the financial statements; and
iii. Also state that the auditor’s opinion is not modified in respect of the matter emphasized.
iv. Emphasis of Matter Para is not a substitute for:
a. Modified Opinion in accordance with SA 705
b. Disclosures in Financial statements as per AFRFW.
c. Matter uncertainty related to Going Concern in accordance with SA 570.
D. Other matter paragraphs in the auditor’s report:
Auditor shall include Other Matter paragraph in the auditor’s report:
i. When it is not prohibited by law or regulation and
ii. When SA 701 applies, matter other than key audit matter can communicate using Other Matter paragraph.
E. Separate section for other matter paragraph:
Include Other Matter paragraph as a separate section of the auditor’s report contain heading “Other Matter,”.
F. Communication with Those Charged with Governance:
If the auditor expects to include Emphasis of Matter or an Other Matter paragraph in the auditor’s report, the auditor shall communicate with those charged with governance regarding the matter going to be included in this para.
SA 701 Communicating Key Audit matters in the Independent Auditor’s Report
A. Scope: SA 701 deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report.
B. Definition of Key Audit Matter:
i. Key Audit Matters are those matters that, in the auditor’s professional judgement. were most significance to the audit of the financial statements of the current period.
ii. Key audit matters are selected from matters communicated with those charged with governance
C. Applicability:
i. For Listed entities:
ii. When required by Law or Regulation.
iii. Public interest: Other entities which has significant public interest,
For example: Because they have large number of stakeholders and considering the nature and size of the business.
D. Purpose of communicating key audit matters:
i. To enhance the communicative value of auditor’s report by providing greater transparency about the audit performed.
ii. KAM provides additional information to the intended users of the F/S to understand the significant management judgments.
iii. Communicating key audit matters in the auditor’s report:
a. Is NOT a substitute for disclosures in the financial statements per applicable financial reporting framework require by management;
b. Is NOT a substitute for the auditor to express a modified opinion per SA 705 Revised.
c. Is NOT a separate opinion on individual matters.
d. Is NOT a substitute for reporting per SA 570 Material uncertainty related to going concern of the entity?
E. Factors Determining key audit matters:
Auditor shall determine, from the matters communicated with those charged with governance, where:
i. Areas of higher assessed risk of material misstatement or significant risks identified in accordance with SA 315
ii. Areas where significant judgement and estimates made by management in the financial statements.
iii. Effect of significant events or transactions that occurred during the period.
F. Manner of communicating key audit matters:
The auditor shall describe each key audit matter, using an appropriate subheading, in a separate section of the auditor’s report under the heading “Key Audit Matters”.
The introductory language in this section of the auditor’s report shall state that:
i. Key audit matters are those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements [of the current period]; and
ii. These matters were addressed in the context of the audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a separate opinion on these matters.
G. Communication with those charged with governance:
i. Communicate those matters the auditor has determined to be the key audit matters; or
ii. If applicable, depending on the facts and circumstances of the entity and the audit, the
auditor’s determination that there are NO key audit matters to communicate in the
auditor’s report.
The following illustrates the presentation in the auditor’s report if the auditor has determined there are NO key audit matters to communicate:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or Material Uncertainty Related to Going Concern section,] We have determined that there are no [other] key audit matters to communicate in our report.
SA 710 Comparative Information – corresponding figures and comparative financial statements
Definition of comparative information: The amounts and disclosures included in financial statements respect of one or more prior periods in accordance with the applicable financial reporting framework
Scope / Objectives:
i. SA 701 deals with the auditor’s responsibilities regarding comparative information in an audit of financial statements.
ii. To obtain sufficient appropriate audit evidence whether the comparative information included in the financial statements are presented as per applicable financial reporting framework.
iii. When the financial statements of the prior period have been audited by a predecessor auditor or were not audited, the requirements and guidance in SA 510 regarding opening balances also apply.
Nature of Comparative Information:
Nature of comparative information presented in financial statements depends on the requirements of the applicable financial reporting framework.
i. There are 2 different broad approaches in respect of such comparative information:
a. Corresponding figures and
b. Comparative financial statements.
ii. Which approach to be adopted is often specified by law or regulation but may also specified by terms of engagement.
iii. Differences between these two approaches are:
a. In corresponding figures approach, the auditor’s opinion on the financial statements refers to current period only whereas
b. In comparative financial statements, the auditor’s opinion refers to each period for which financial statements are presented.
.
Audit Procedures regarding Comparative Information:
Auditor shall determine whether financial statements include the comparative information required by the applicable financial reporting framework and whether such information is appropriately classified.
For this purpose, the auditor shall evaluate whether:
i. Comparative information agrees with the amounts and other disclosures presented in the prior period.
ii. Accounting policies reflected in the comparative information are consistently followed in current period or, if there are any changes in accounting policies the same has been properly accounted and adequately presented and disclosed.
iii. If auditor aware about possible material misstatement in the comparative information while performing current period audit, then auditor shall perform additional audit procedures to obtain sufficient appropriate audit evidence to determine whether a material misstatement exists.
iv. If the auditor had audited the prior period’s financial statements, the auditor shall also follow relevant requirements
a. By SA 560 Subsequent Events
b. By SA 580 Written Representation
Audit Reporting regarding Corresponding Figures:
A. Corresponding figures:
Prior period amounts and other disclosures are considered as integral part of the current period financial statements
B. When corresponding figures are presented, the auditor’s opinion shall not refer to the
corresponding figures EXCEPT in the following circumstances:
i. If prior period audit report issued with Modified Opinion (qualified opinion, a disclaimer of opinion, or an adverse opinion) and the matter which gave rise to modified opinion unresolved till current period check,
a. If that Matter affecting current period’s figures the auditor shall modify the auditor’s opinion on the current period’s financial statements.
(In the Basis for Modification paragraph auditor shall Refer both the current period’s figures and the corresponding figures for the matter giving rise to the modification).
b. If that Matter not affecting current period’s figures the auditor shall modify the auditor’s opinion on the current period’s financial statements.
(In the Basis for Modification paragraph auditor shall Refer the corresponding figures for the matter giving rise to the modification)
ii. If prior period audit report issued with Unmodified Opinion but the current auditor obtains audit evidence that a material misstatement exists in the prior period financial statements,
a. Auditor shall verify whether the misstatement has been dealt per Applicable financial reporting framework,
b. If not, the auditor shall express qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, with respect to the corresponding figures included therein.
C. Prior period financial statements audited by a predecessor auditor:
If the financial statements of prior period were audited by a predecessor auditor and the auditor decided to rely on predecessor auditor’s report for the corresponding figures and law or regulation also permitted to do so.
Then Auditor shall state in an Other Matter paragraph:
a. That the financial statements of the prior period were audited by the predecessor auditor.
b. The type of opinion expressed by the predecessor auditor and, if the opinion was modified, state the reasons.
c. The date of prior period audit report.
D. Prior period financial statements not audited:
i. If the prior period financial statements were not audited, the auditor shall state in an Other Matter paragraph that the corresponding figures are unaudited.
ii. However, the above statement does not relieve from auditor responsibility to obtain
sufficient appropriate audit evidence that the opening balances do not contain material misstatements.
Audit Reporting for Comparative Financial Statements:
A. Definition of comparative financial statements:
Prior period amounts and other disclosures are included for comparison with financial statements of the current period.
B. Auditor’s Opinion: When comparative financial statements are presented, the auditor’s opinion shall refer to each period for which financial statements are presented.
C. Difference of opinion: When reporting on prior period financial statements in
connection with the current period’s audit, if the auditor’s opinion on such prior period
financial statements differs from the opinion the auditor previously expressed, then auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph per SA 706.
D. Prior period financial statements audited by a predecessor auditor:
i. If the financial statements of the prior period were audited by a predecessor auditor, in addition to expressing an opinion on the current period’s financial statements,
Then Auditor shall state in an Other Matter paragraph:
a. That the financial statements of the prior period were audited by the predecessor auditor.
b. The type of opinion expressed by the predecessor auditor and, if the opinion was modified, state the reasons.
c. The date of prior period audit report.
ii. If prior period audit report issued with Unmodified Opinion but the current auditor obtains audit evidence that a material misstatement exists in the prior period financial statements,
the auditor shall communicate misstatement with the appropriate level of management and those charged with governance and informed the predecessor auditor.
iii. If the prior period financial statements are amended, and the predecessor auditor agrees to issue a new auditor’s report on the amended financial statements of the prior period, the auditor shall report only on the current period.
E. Prior period financial statements not audited:
i. If the prior period financial statements were not audited, the auditor shall state in an Other Matter paragraph that the corresponding figures are unaudited.
ii. However, the above statement does not relieve from auditor responsibility to obtain
sufficient appropriate audit evidence that the opening balances do not contain material misstatements.
SA 299 Joint Audit of Financial Statements
A. Meaning: The process of appointing two or more individuals or firms or combination of individuals and firms is known as joint audit.
B. Advantage of Joint Audit:
i. Sharing of expertise.
ii. Mutual consultation.
iii. Lower workload.
iv. Better quality of performance.
v. Improved service to the client.
vi. A sense of healthy competition towards a better performance.
vii. In respect of multi-national companies, the work can be spread with local firms of the nation which are in a better position to deal with detailed work and the local laws and regulations.
C. Disadvantages of Joint Audit:
i. Fees being shared.
ii. Psychological problem where different firms are associated in the joint audit.
iii. Superiority complexes of some auditors.
iv. Problems of co-ordination of the work.
v. Areas of common work concern being neglected.
vi. Uncertainty about the liability for the work done.
D. Responsibility of joint auditor:
I. Individual / Separate Responsibilities:
Where work is divided among the joint auditors on a suitable basis then each joint auditor is responsible only for the work performed by them.
Generally, the work will be divided based on the following basis.
i. Items of Assets or liabilities
ii. Income or Expenditure
iii. Geographical areas
iv. Identified units
v. Period of Financial statements
II. Joint / Combined Responsibility:
In the following areas all the joint auditors will have Joint or combined responsibility.
i. Where audit work which is not divided among themselves.
ii. Where decisions taken by all the joint auditors jointly.
iii. Where matters brought to the notice of all joint auditors and agreed by all of them.
iv. For verifying presentation and disclosure requirements of financial statements as per AFRFW.
v. For ensuring audit report complies with relevant standards.
E. Audit reporting in case of joint audit:
i. Generally, all the joint auditors arrive common conclusions and express common opinion through a single audit report.
ii. However, joint auditor is NOT bound by majority’s opinion.
iii. If there is a different opinion among joint auditors then such disagreeing auditor can express his own opinion by a separate audit report.
iv. In such a case each joint auditor shall refer about other joint auditor’s report.
Note: Each joint auditor is entitled to rely on the work performed by another joint auditor and no need to review the work performed by others Joint Auditor.
F. Special considerations as per SA – 299:
i. Overall audit strategy established by All the joint auditors jointly per SA – 300 “Audit Strategy, Planning and Program”
ii. Engagement partner and Engagement Team of each Joint auditors involve in Audit planning.
iii. The following points shall be kept in mind while developing Joint Audit Plan:
a. Identify division of areas and common areas.
b. Ascertain reporting objectives of engagement team.
c. Communicate significant factors identified by joint auditors.
d. Consider the results of preliminary engagement activities.
e. Ascertain nature, timing and extent of resources required.
iv. Each Joint auditors shall assess the risk of Material Misstatement and communicate to other Joint auditors.
v. Joint auditors should discuss and document the nature, timing and extent of audit procedures to be performed for Common areas and Specific areas.
vi. Joint auditors shall obtain common engagement letter and common management representation letter.
vii. Work allocation between joint auditors shall be documented and signed by all the joint auditors.
Audit of Branch Office Accounts
A. Books of Accounts and Audit of Branches [section 128]:
i. As per section 128(1) of the Companies Act, 2013,
ii. Every company must keep books of account at its registered office for every financial year which give true and fair view of the state of affairs of the company and transactions, including its branches.
iii. Books of account must be kept on accrual basis and according to the double entry system of accounting.
iv. Board of Directors may decide to keep some or all of the books of account and other relevant papers at another place in India, but they must inform the Registrar of that place within 7 days.
v. Company may keep the books of account and other relevant papers in electronic mode as prescribed by law.
vi. If a company has a branch office in India or outside India, it must send proper summarized returns of the transactions by the branch office to the company’s registered office or the other place.
B. Audit of Branches:
As per section 143(8) of the Companies Act, 2013,
Prescribes the duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor.
Where a company has a branch office, the accounts of that branch office shall be audited either:
I. Indian Branches by:
a. Company’s auditor or
b. Any other person qualified for appointment as auditor under company Act 2013 under section 139.
II. Foreign Branches by:
a. Company’s auditor or
b. Accountant or
c. Any other person duly qualified to act as an auditor under laws of that country in which branch is situated.
C. Reporting by Branch Auditor:
Rule 12 of the Companies (Audit and Auditors) Rules, 2014,
i. Branch auditor shall submit his branch audit report to the company’s auditor
ii. Same as Prescribed under section 143(1) to 143(4)
iii. Reporting of fraud under section 143(12) shall also extend to branch auditor.
iv. SA 600 Using the work of another auditor
SA 600 Using the Work of Another Auditor:
A. Principal auditor means the auditor with responsibility for reporting on the financial information of an entity.
Financial information includes the financial information of one or more components audited by another auditor.
B. Other auditor means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component.
C. Component means a division, branch, subsidiary, joint venture, associated enterprises or other entity whose financial information is included in the financial information audited by the principal auditor.
D. Using the Work of Another auditor:
When the accounts of the branch are audited by a person other than the company’s auditor (principal auditor),
i. There should be clear understanding about the role of other auditor and the role of company’s auditor in relation to the audit of branch and the audit of company as a whole;
ii. An effective audit requires a good relationship between the branch auditor and the company auditor
iii. The Council of the Institute of Chartered Accountants of India has dealt with these issues in SA 600, “Using the Work of another Auditor”.
iv. Principal auditor has the right to visit a component and review the books and records if necessary. If another auditor has been appointed for the component, the principal auditor can generally rely on another auditor work
v. Principal auditor may visit the other auditor based on their professional competence and previous audit work.
v. Further, it requires that the principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor’s purposes,
vi. When using the work of another auditor, the principal auditor should ordinarily perform the following procedures:
a. Principal auditor should inform the other auditor about using their work and coordinate efforts at audit planning stage.
b. Matters requiring special attention should be communicated to the other auditor,
c. Procedures for identifying inter-component transactions and disclosure requirement.
d. Advise the other auditor of significant accounting, auditing, and reporting requirements, to ensure the compliance.
vii. Principal auditor may discuss audit procedures with the other auditor or review a written summary, often in the form of a completed questionnaire or checklist.
Reporting Requirements under the companies act, 2013
Section 143 of Companies Act, 2013 contains, inter alia, reporting requirements of auditor of a company in form of duties.
1. Reporting requirement relating to matters [section 143(1)]:
Auditor shall inquire into following matters given as under:
i. Whether loans and advances made by the company on the basis of security:
a. Have been properly secured and
b. Whether the terms are prejudicial to the interests of the company or its members.
ii. Whether loans and advances made by the company have been shown as deposits.
iii. Whether book entries are prejudicial to the interests of the company.
iv. Whether personal expenses have been charged to revenue account.
v. Whether any Shares or Securities held by the company are sold at a price less than purchase price.
vi. Whether cash received for allotment of shares, if not check balance sheet showing correct call-in arrears.
B. Reporting Requirements: Reporting for above matter required only when the result of such enquiry is adverse (Negative)
2. Reporting on accounts examined [section 143(2)]:
i. Auditor’s report issued to the members of the company.
ii. Auditor must write a report on the accounts and financial statements he checked, and whether they follow the rules and Audit standards, and show the true and fair view of the company’s finances
iii. Auditor must also report on any other matters as per Rule 11 of the Companies (Audit and Auditors) Rules, 2014
3. Additional reporting requirements under section 143(3):
Further, in terms of section 143(3), the auditor’s report shall also state
i. Whether information and explanations for the purpose of his audit received or not;
ii. Whether proper books of account as required by law have been kept or not
iii. Whether audited branch account details sent to him or not
iv. Whether company’s balance sheet and profit and loss account agree with the books of account or not;
v. Whether financial statements comply with the accounting standards or not.
vi. Observations or comments on financial transactions which have any adverse effect on the functioning of the company;
vii. Whether any director is disqualified under section 164(2).
viii. Any qualification, reservation or adverse remark relating to maintenance of accounts and other matters.
ix. Whether the company has adequate internal financial controls (IFCs) with reference to financial statements and its operative condition.
Reporting requirement of internal financial controls (IFCs) with reference to financial statements shall not be applicable to a private company which is a:
a. One person company; or
b. Small company; or
c. Private Company having turnover less than Rs. 50 crores as per latest audited financial statement.
d. Private Company having borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than Rs.25 crore.
x. Other matters prescribed in Rule 11 of the Companies (Audit and Auditors) Rules, 2014 which are as under:
a. Whether company disclosed impact of pending litigations on its financial position in its financial statement;
b. Whether company has made provision, as required under any law or accounting standards, for material losses, if any.
c. Whether any delay in transferring amounts to the Investor Education and Protection Fund by the company.
d. Whether the management has confirmed that, except as noted to accounts, the company has NOT used any of his funds to finance any other parties (“Intermediaries”) directly or indirectly to support other parties chosen by the company (“Ultimate Beneficiaries”) or offer any guarantee and security
e. Whether the management has confirmed that, except as noted to accounts, the company has NOT taken any funds from any parties (“Funding Parties”), directly or indirectly to finance chosen by the Funding Party (“Ultimate Beneficiaries”)or offer any guarantee, security
xi. Whether the dividend declared or paid during the year are in accordance with section 123 of the Companies Act, 2013.
xii. Whether Accounting software used by the company has a feature of recording audit trail (edit log) and check its operated throughout the year and the audit trail feature has not been tampered.
Audit trail has been preserved by the company as per the statutory requirements for record retention.
Reporting Requirement: Reporting for above matter required to report even the result is Favor (positive) or Adverse (negative).
4. Reporting on any other matter specified by central government:
As per section 143(11), the Central Government may, in consultation with the National Financial Reporting Authority, may issue general or special order, to specified class of companies, required to report any additional matter specified in the order.
[Note: Companies (Auditor’s Report) Order, 2020 has been notified]
5.Reporting on Frauds [section 143(12)]:
A. Reporting to the central government:
i. As per section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014,
ii. if an auditor of a company has a reason to believe that an offence of fraud, being or has been committed in the company individually an amount of Rs. 1 crore or above, by its Officers or Employees, the auditor shall report the fraud to the Central Government within prescribed time and in prescribed manner.
B. Reporting to audit committee or board:
i. In case of a fraud involving lesser than the specified amount [i.e., less than Rs. 1 crore], the auditor shall report the matter to the audit committee constituted under section 177 or to the Board within prescribed time and in prescribed manner.
ii. Auditor also report matters pertaining to fraud at point (xi) of paragraph 3 of CARO,2020.
Companies (Auditor’s Report) Order, 2020 [CARO, 2020]
A. Applicability of the Order:
CARO 2020 is an additional reporting requirement Order.
CARO 2020 applies to every company including a foreign company.
However, CARO 2020shall not apply to following companies:
i. Banking companies
ii. Insurance company
iii. Section 8 Company of the Companies Act;
iv. One Person Company.
v. Small company and
vi. Private Limited Company:
a. Not being a subsidiary or holding of a public company and
b. Total Paid up capital and reserves & surplus shall not exceed Rs. 1 Crore as on the balance sheet date and
c. Total Borrowings from banks and financial institutions shall not exceed Rs. 1 Crore at any point of time during the financial year and
d. Total Turnover calculated as per Schedule III (including revenue from discontinuing operations) shall not Exceed Rs. 10 crores during the financial year.
B. Additional Points:
I. In the case of holding and subsidiary companies:
i. The limits for applicability of CARO should be computed on the basis of standalone financial statements of holding and subsidiary companies separately but not on the basis of consolidated financial statements.
ii. CARO, 2020 reporting shall not apply to the Auditor’s Report on Consolidated Financial
Statements “EXCEPT Clause 21”.
II. In the case of companies having branches:
i. The limits for Applicability of CARO shall be computed from the entire company’s view including the amounts form all the branches but not w.r.t each branch wise.
ii. Once it is applicable to the company as a whole, then each and every branch of the company will be covered under CARO. Therefore, Branch auditors must report on 21 matters of CARO in their branch audit report.
Matters to be included in auditor’s report:
1. Fixed Assets:
i. Fixed Asset Register: Whether company is maintaining proper records showing full particulars including
a. Quantitative details of PPE and Intangible Assets (Fixed Assets) and
b. Situation of PPE.
ii. Physical Verification:
a. Whether fixed assets have been physically verified by the management at reasonable intervals.
b. Whether any material discrepancies were noticed during verification, the same have been properly dealt in the books of accounts.
iii. Immovable Property: Whether title of immovable properties held in the name of the company. If not, provide the details of the same:
a. Property Description
b. Gross Carrying Value
c. Held in Name of Whom (I.e., Promoter or director or employees)
d. Reason for Not being held in name of Company.
iv. Revaluation:
Whether the company has revalued its PPE (including Right of Use assets) or intangible assets or both during the year and, if so:
a. Whether the revaluation is done by Registered Valuer.
b. Specify the amount of change, if change is 10% or more in aggregate of net carrying value of each class of PPE or intangible assets.
v. Disclosure of Benami transactions:
Whether any proceedings initiated or pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and if so, whether the company has appropriately disclosed the details in its financial statements.
2. Inventories:
i. Physical Verification:
a. Whether physical verification of inventory has been conducted by management at reasonable intervals.
b. Whether any discrepancies of 10% or more in the aggregate for each class of inventory have been dealt properly in the books of account.
ii. Working Capital Loans:
a. Whether company has been sanctioned with working capital limit in excess of five crore rupees during the year, in aggregate, from banks or financial institutions on the basis of security of current assets;
b. Whether the quarterly returns or statements filed by the company with such banks or financial institutions are agreed with books of accounts, if not, give details.
3. Investments, Guarantee, Security, Loans or Advances to Companies, Firms, LLP’s or Any Other Parties: (not applicable to companies whose principal business is to give loans)
i. Applicability:
Whether during the year the company has provided loans or advances in nature of loans, or guarantee, or security to any other entity if so, indicate:
a. To Related Parties: (To subsidiaries, Joint ventures and Associates).
Report Aggregate amount of loans, or guarantee, or security during the year, and balance outstanding at the balance sheet date.
b. To Unrelated Parties: (To parties other than subsidiaries, joint ventures and associates).
Report Aggregate amount of loans, or guarantee, or security during the year, and balance outstanding at the balance sheet date.
ii. Terms and conditions:
Whether terms and conditions of all loans Investments, Guarantee, Security, Loans or Advances provided are not prejudicial to the company’s interest.
iii. Repayment Regularity:
Whether repayment or receipts of principal and interest are regular per schedule.
iv. Overdue > 90 Days:
State the total amount overdue for more than ninety days, and whether reasonable steps have been taken to recover the principal and interest.
v. Rescheduling or Extension of Overdue loans:
Whether any loan or advance has fallen due during the year, has been renewed or extended or fresh loans granted to settle over dues of existing loans, if so,
a. Specify the aggregate amount of such dues renewed or extended or settled by fresh loans and
b. Percentage of total amount of loans or advances granted during the year.
vi. Demand Loans without Repayment Period:
Whether company has granted any loans or advances in the nature of loans either repayable on demand or without specifying terms or period of repayment, if so,
a. Specify the aggregate amount and percentage of total loans granted.
b. Aggregate amount of loans granted to Promoters; related parties as defined in clause
(76) of section 2 of the Companies Act, 2013
4. Other Loans, Investments, Guarantees made by Company:
In respect of loans, Investments, Guarantees, and securities provided by company, whether provisions of section 185 & 186 have been complied? If not, provide the details.
5. Deposits:
In case the company has accepted deposits from the public,
a. Verify company compliance with the following:
i. Provisions of Sections 73 to 76 of the Co.’s Act, 2013 or
ii. Guideline issued by the RBI and
iii. An order passed by CLB or any court or any other Tribunal, if any.
b. If there is any Non-compliance, state the nature of contraventions.
6. Cost Records:
i. Whether maintenance of cost records has been prescribed by the Central Government under
section 148(1) of the Co.’s Act, 2013 is applicable.
ii. If applicable, whether such accounts and records are maintained.
7. Statutory Dues:
i. Undisputed Dues:
a. Is the company regularly depositing undisputed statutory dues to appropriate authorities e.g. provident fund, ESI, Income Tax, service tax etc.
b. If not, provide information about outstanding arrears of statutory dues as at the last day of financial year concerned for a period more than six months from the date, they became payable.
ii. Disputed Dues:
In case dues have not been deposited on account of any dispute, the auditor shall indicate
a. Amounts involved in dispute and
b. Forum (concerned department) where dispute is pending.
8. Discovery of Undisclosed Income:
Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has been properly recorded in the books of account during the year.
9. Default in Repayment of Dues:
i. Lender wise default:
Whether company has defaulted in repayment of borrowings of loans to a financial institution, Bank, Debenture holders or Governments.
If so, the period and amount of default to be reported each lender wise in the following Format:
a. Nature of Borrowing
b. Name of the lender
c. Amount Not Paid on Due Date
d. Principal or Interest or both
e. Delay in Days
f. Remarks, if any.
ii. Willful defaulter:
Whether the company is declared as willful defaulter by any bank or financial institution or other lender
iii. Purpose of term loans:
Whether term loans used for the purpose it was obtained; if not, Report the amount of loan diverted and the purpose it was used.
iv. Short Term Loan for Long Term Purpose:
Whether funds raised on short term basis have been utilized for long term purposes, if yes, Repot the nature and amount.
v. Loans Taken to Meet Subsidiary Company Needs:
a. Whether company has taken any loan to meet the obligations of its subsidiaries, associates or joint ventures.
b. if so, report details and nature of such transactions amount in each case.
vi. Loan Against Pledge of Securities of Subsidiaries:
a. Whether the company has raised any loans during the year “on pledge of securities held in subsidiary/associate/joint venture,
b. If so, report whether the company has defaulted in repayment of such loans.
10. End Use of Funds Raised:
i. IPO / FPO:
a. Whether money raised by company in form of initial or further public offer (including debt instruments) were utilized for the purposes it raised.
b. If not, report the details along with the defaults, delays & subsequent rectifications.
ii. Preferential Allotment:
a. Whether company has made any preferential allotment or private placement of shares or ‘fully or partly’ convertible debentures during the year
b. If so, verify the following:
– Compliance with section 42 of the act. and
– The amount utilized for the purposes it raised.
c. If not provide the details in respect of the amount involved & nature of non-compliance
11. Reporting of Frauds:
i. Noticed or Reported:
Whether any fraud by the company or on the company by its officers or employees has been noticed or reported during the year.
If yes, Report the nature and the amount of fraud.
ii. Sec. 143(12) Whether any report under Sec. 143(12) of the Companies Act has been filed by the auditors in Form ADT-4 per Rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government.
iii. Whistle Blower Complaints:
Whether auditor has considered whistle-blower complaints, if any, received during the year by the company.
12. Nidhi Company:
i. Whether Nidhi Company has complied with the net owned funds (net worth) to deposits in the ratio of 1:20 to meet out the liability.
i.e., For every one rupee of net owned funds, Nidhi company cannot accept more than 20 rupees of deposits.
ii. Whether Nidhi Company maintaining 10% Unencumbered term deposits per Nidhi Rules, 2014 to meet out the liability.
iii. Whether any default in repayment of interest or deposits for any period and if so, report the details.
13. Related Party Transaction:
i. Whether all transaction with related parties’ compliance with section 177 & 188.
ii. Related Party Transaction Details have been disclosed in financial statements as per applicable accounting standards.
14. Internal Audit System:
i. Whether company has an internal audit system commensurate (proportionate) with nature and size of its business.
ii. Whether reports of the Internal Auditors for the period considered by the statutory auditor.
15. Non-Cash Transaction:
Whether Company has entered into any Non-Cash Transactions with directors & if so, complied with provisions of section 192.
16. Non-Banking Financial Institution:
i. 45-IA of RBI Act: Whether the company is required to registered under section 45-IA of Reserve Bank of India Act 1934, and If so, whether the registration has been obtained.
ii. NBFC Activities: Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934.
iii. Core Investment Company:
a. Whether the company is a Core Investment Company (CIC) as defined by Reserve Bank of India, if so,
b. Whether it continues to fulfil the criteria of a CIC, In case of company exempted or unregistered CIC, whether it continues to fulfil such criteria.
c. Whether the Group has more than one CIC, if yes, report the number of CICs.
17. Cash Losses:
Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses.
18. Resignation of Auditors:
i. Whether there has been any resignation of the statutory auditors during the year, if so,
ii. Whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors.
19. Material Uncertainty:
On the basis of the financial ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans, Whether auditor in his opinion:
i. There is no material uncertainty exists as on the date of the audit report,
ii. That company is capable of meeting its liabilities existing at the date of balance sheet which are fall in due within a period of one year from the balance sheet date.
20. Corporate Social Responsibility Fund:
i. Whether, in respect of other than ongoing projects, the company has transferred unspent amount to Fund specified in Schedule VII of the Companies Act within a period of six months of the expiry of the financial year in compliance with under section 135(5) of Companies Act.
ii. Whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any ongoing project, has been transferred to special account as per provision under section 135(6).
21. Modified Opinion (CARO) In Other Group Companies:
i. Whether any qualifications or adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements,
ii. If yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.
Reasons To be Stated for Unfavorable or Qualified Answers:
i. Where, in auditor’s report, the answer to any of the above questions is unfavourable or qualified, then the auditor’s report shall state the basis for such unfavourable or qualified answer.
ii. Where the auditor is unable to express any opinion on any specified matter, then auditor report shall indicate such fact and reasons why is not possible for him to give his opinion on the same.
