Developments in Audit Reporting Requirements

(including Overview of SA 700, 705,706 and emphasizing upon the auditor’s reporting responsibility under Companies Act, 2013)

By N. Jayendran

Relevant Sections as per New Companies Act ∗ Section 143 – Powers and duties of auditors and auditing standards. ∗ Section 145- Auditor to sign audit report. ∗ Section 141- Eligibility, qualification and disqualification of auditors. ∗ Section 134- Financial Statement, Board’s report etc. ∗ Section 133- Central Government to prescribe accounting standards. ∗ Section 164- Disqualifications for appointment of director.

Sec 143(1) Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company The Auditor is required to report on the following matters if the findings are adverse a)

whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members

b)

whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;

c)

where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

S143(1) continued a) whether loans and advances made by the company have been shown as deposits; b) whether personal expenses have been charged to revenue account; c) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading: Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

Sec 143(3) The auditor’s report shall also state— ∗ a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; ∗ (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him; ∗ (c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report; ∗ (d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; ∗ (e) whether, in his opinion, the financial statements comply with the accounting standards;

Sec 143(3)

∗ (f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; ∗ (g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; ∗ (h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith ∗ (i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; ∗ (j) such other matters as may be prescribed. (prescribed u/r 11 of Companies (Audit and Auditors) Rules 2014

4) 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.

Rule 11 of Companies (Audit and Auditors) Rules, 2014 Under rule 11 of Companies (Audit and Auditors) Rules , 2014 the following further reporting requirements are inserted. a) Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement; b) Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts; c) Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.

Sec 143 (5)

In the case of a Government company, the Comptroller and Auditor-General of India shall appoint the auditor under subsection (5) or sub-section (7) of section 139 and direct such auditor 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 which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company.

Sec 143(12) to 143(14) Fraud Reporting by Auditors ∗ If the Auditor has reason to believe during the course of performance of his duties that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed ∗ Reporting will not construed to be contravention of any provision if done in good faith. ∗ Reporting is to be done in form ADT-4 within 60 days of detecting the fraud. The procedure in Rule 13 of Companies (Audit and Auditors ) Rules, 2014 is to be followed. ∗ The requirement to report also applies to the Cost Accountant in practice and the Company Secretary in practice. ∗ The fine for not reporting is between one lakh to twenty-five lakhs.

∗ The ICAI has issued a Guidance Note on the subject.

Gearing up to be in control of Internal Financial Controls ∗ Indian Regulations have been modified to reflect the development in the Western world , Introduction of Internal Financial Control ( IFC) in the companies Act 2013. According to the Companies Act 2013, the term IFC has been defined as the policies and procedures adopted by the company to ensure orderly and efficient conduct of its business , including adherence to company policies , safeguarding of its assets , prevention and detection of frauds and errors , accuracy and completeness records, and the timely preparation of reliable financial information ∗ u/s 134- in case of listed companies, the directors’ responsibility states that director have laid IFC to be followed by the company and that such controls are adequate and operating effectively. ∗ Sec 177- Audit committee may call for comments of auditors about IFC before their submission to the Board and also discuss the related issues with the internal and statutory auditors and the management of the company ∗ Sec 143- The auditor’s report should also state whether the company has adequate IFC system in place and operating effective of such controls. In terms of rule 10A , the reporting requirement by Auditors has been deferred by one year and is applicable for the reports issued for the accounting year 2015-16 onwards ∗ Schedule IV- The Independent directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensive.

Illustrative formats issued… The ICAI has issued illustrative set of audit reports for the following situations. 1.

Unmodified Opinion and Emphasis of Matter, where the auditor has other reporting responsibilities required under the Companies Act 2013 and /or other regulatory requirements including the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013.

2.

Unmodified Opinion and Emphasis of Matter, where the auditor has other reporting responsibilities required under the Companies Act 2013 and /or other regulatory requirements, but does not have the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013.

3.

Qualified Opinion w.r.t true and fair view of FS, where the auditor has other reporting responsibilities required under the Companies Act 2013 and /or other regulatory requirements, but does not have the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013.

4.

Qualified Opinion since the auditor was unable to obtain sufficient appropriate audit evidence , where the auditor has other reporting responsibilities required under the Companies Act 2013 and /or other regulatory requirements, but does not have the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013.

5.

Adverse Opinion , where the auditor has other reporting responsibilities required under the Companies Act 2013 and /or other regulatory requirements, but does not have the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013.

6.

Disclaimer of Opinion , where the auditor has other reporting responsibilities required under the Companies Act 2013 and /or other regulatory requirements, but does not have the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013

Structure of the Auditor’s Report Title Auditor’s Signature , Date and Place

Other Reporting Responsibiliti es

Addressee

Auditor's Report

Introductory paragraph

Management Responsibilit y Paragraph

Opinion Paragraph Auditor’s Responsibilit y Paragraph

Management Responsibility Para.. New Auditor’s Report

As per Existing Auditor’s Report ∗

∗

∗

Management Responsibility for the Financial Statements

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 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.

Management Responsibility for the Financial Statements

Standalone

The 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 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, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate 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 statements that give a true and fair view and are free from material misstatement, whether due to fraud or error

Auditor’s Responsibility Para.. New Auditor’s Report

As per Existing Auditor’s Report ∗

∗

∗

Auditor’s Responsibility

∗

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.

∗

Our responsibility is to express an opinion on these standalone financial statements based on our audit.

∗

We have taken into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made thereunder.

∗

We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

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 financial statements are free from material misstatement.

Auditor’s Responsibility Para.. New Auditor’s Report

As per Existing Auditor’s Report ∗

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. 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.

∗

An audit involves performing procedures to obtain audit evidence about the amounts and the 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 financial control relevant to the Company’s preparation of the financial statements that give a true and fair view presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and the operating effectiveness of such controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, 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 on the standalone financial statements.

Standards pertaining to Audit Reports SA 700

Forming an Opinion and Reporting on Financial Statements - to be used only in case of unmodified opinion.

SA 705

Modifications to the Opinion in the Independent Auditor’s Report - to be used only in case of modified opinion.

SA 706

Emphasis of Matter Paragraphs and Other Matter paragraphs in the Independent Auditor’s Report - to be used if there is an emphasis of matter and it also deals with Other Matters

Replaces AAS 28 – Auditor’s Report on Financials Statements. Applicability to accounting periods beginning on or after April 1, 2012 vide ICAI’s announcement dated April 17, 2012 Not applicable in cases where reports formats are prescribed under various laws or regulations - ICAI’s Announcement – July 29, 2013

SA 700 Forming an Opinion and Reporting on Financial Statements

Objective and Scope  This standard deals with the Auditor’s responsibility to form an opinion on the financial statements and the form and content of the Auditor’s Report.

 The Standard deals with ‘Clean’ and ‘unmodified’ opinion in Audit Report.

 Promotes consistency in Audit Report.

 Applicable in case of General Purpose Financial Statements – prepared in accordance with a general purpose financial reporting framework (FRF). •

Fair presentation framework

•

Compliance framework

Forming a Clean (Unmodified) Opinion  The financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework including qualitative aspects of entity’s accounting policies and possible bias in management’s judgments.  Has obtained reasonable assurance about whether the financial statements are free of material misstatements due to Fraud or Error based on : Sufficient and appropriate audit evidence;  Whether uncorrected misstatements are not material, Individually or in aggregate in accordance with SA 450.  Requirements of the reporting framework (eg., the Accounting Standards) have been materially complied with  Disclose the accounting policies selected and applied and Consistency and appropriateness of those policies  Reasonable estimates are used by the management  Information presented in relevant, reliable, comparable and understandable  Disclosures are adequate to enable users to understand the effect of material transactions  Terminology used is appropriate.

Form of Opinion • When the auditors concludes that the financial statements are prepared, in all material respects, in accordance the applicable financial reporting framework, he shall express an Unmodified Opinion • If the auditor concludes:–

That based on audit evidence, the financial statements are NOT free of material misstatements;

–

That he is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free of material misstatements; –

then he shall issue a modified opinion in accordance with SA705.

SA 705 Modifications to the Opinion in the Independent Auditor’s Report

Introduction and Scope  Deals with circumstances when the auditor concludes modification to the report is necessary.  Types of modified opinions 

Qualified Opinion



Adverse Opinion



Disclaimer of Opinion

 The decision on the type of opinion depends upon: 

The nature of the matter giving rise to the modification i.e. whether the financial statements are materially misstated



Inability to obtain sufficient and appropriate audit evidence



Auditor’s judgment about the pervasiveness of the effects or possible effects of the matter

 The auditor shall modify the opinion when:  He concludes that, based on audit evidence, the financial statements as a whole are NOT free of material misstatements; or  The auditor is UNABLE to obtain sufficient appropriate audit evidence to conclude that the financial statements are free of material misstatements

Material Misstatements A misstatement is the difference between the amount of classification, presentation, or disclosure reported in the financial statements and the classification, presentation, or disclosure required as per the applicable financial reporting framework.

This may arise in relation to : 1.

Appropriateness of the selected accounting policies



Selected accounting policies are not consistent with the applicable financial reporting framework ;



Financial statements , including notes thereon , do not represent underlying transactions and events that achieves fair presentation

3.

Application of selected accounting policies



When accounting policies are not applied consistently , including consistency between periods , similar transactions and events ;



Method of application is erroneous

5.

Appropriateness or adequacy of disclosures in the financial statements :



Financial statements do not include all disclosures required by the applicable financial reporting framework



Disclosures are not presented in accordance with the applicable financial reporting frame work



The financial statements do not provide the disclosures necessary to achieve fair presentation

Auditors ’ Report Modification Matrix: Nature of matter giving rise to the modification

Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statements Material but not pervasive

Material and Pervasive

are

Qualified opinion

Adverse opinion

Inability to obtain sufficient appropriate audit evidence

Qualified opinion

Disclaimer of opinion

Financial statements materially misstated

Modifications in the Report QUALIFIED OPINION The auditor shall express qualified opinion when : 

He concludes that the misstatements, individually or in aggregate , are MATERIAL , BUT NOT PERVASIVE to the financial statements



He is unable to obtain sufficient appropriate audit evidence but also concludes that the possible effects of undetected misstatements could be MATERIAL, BUT NOT PERVASIVE

ADVERSE OPINION When the auditor concludes that having obtained sufficient appropriate audit evidence, the misstatements, individually or in aggregate, are BOTH MATERIAL AND PERVASIVE, he issues an adverse opinion.

DISCLAIMER OF OPINION  When the auditor is unable to obtain sufficient appropriate audit evidence and concludes that the possible effects of undetected misstatements are BOTH MATERIAL AND PERVASIVE, he issues an disclaimer of opinion .  In extremely rare circumstances , having obtained sufficient appropriate audit evidence, BUT due to multiple uncertainties , the auditor is not able to form an opinion , due to possible interaction of those uncertainties and their possible cumulative outcomes , he issues a disclaimer of opinion.

Inability to obtain Sufficient Appropriate Audit Evidence 

Auditor’s inability to obtain sufficient appropriate audit evidence may arise from :



Circumstances beyond the control of the entity; eg. Where records have been destroyed by fire, or seizure by government authority, etc.



Circumstances relating to nature or timing of the Auditor’s work eg. When auditor is appointed on such date that he cannot observe the physical count



Limitation imposed by the management Eg: Management prevents auditors from inventory counting / obtaining external confirmations.



In case limitation is imposed by the management, the auditor shall request the management to remove the limitation



If the management still persists, Auditor shall communicate it to those charged with governance and determine if alternative audit procedures are possible.



If the auditor is unable to obtain sufficient appropriate audit evidence, he shall:



Resign from the engagement, where practicable and not prohibited by law



If resignation is not possible due to stage of the auditor legal or professional restriction, the auditor shall give a disclaimer of opinion



Where the auditor decides to resign, he shall inform to those charged with the governance any matters regarding misstatements identified during the audit that would have given rise to modification in the report

Form and Content of Modified Report  In addition to the elements of the auditor’s report referred in SA 700 , the following need to be added for modified reports :  Amendments in the Auditor’s responsibility paragraph  Basis of modification paragraph  Amendments in the opinion paragraph

Form and Content of Modified Report (Contd..) Amendments in the Auditor’s responsibility paragraph  In case of qualified opinion or adverse opinion, the auditor shall state that he believes that the audit evidence is sufficient and appropriate to provide a basis for his MODIFIED audit opinion  In case of disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence :  The auditor shall amend the introductory paragraph to state that he was engaged to audit the financial statements;  He shall amend the Auditor’s responsibility paragraph and scope to include the following“ because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph , we have not been able obtain sufficient appropriate audit evidence to provide a basis for our audit opinion.”

Form and Content of Modified Report Basis of modification paragraph  This is placed immediately before the opinion paragraph and under the heading “Basis of Qualified Opinion, Basis of Adverse Opinion, Basis of Disclaimer of Opinion ” Modification may relate to :  Specific amounts in the financial statements–in this case, include the description and quantification of the financial effects, if practicable . If not practicable , state the fact in the report  Narrative disclosures in the financial statements–in this case explain how the disclosures are misstated  Non-disclosure of information required to be disclosed–in this case  Discuss the non disclosure with those charged with governance  Describe the nature of omitted information  If practicable, not prohibited by law and if sufficient appropriate audit evidence relating to that item is obtained, include the omitted disclosure  Even if the auditor has expressed an adverse opinion or disclaimer of opinion, he shall describe other matters which he is aware that would have required a modification

Form and Content of Modified Report (Contd..)

Amendments in the opinion paragraph  Use the heading–“ Qualified Opinion ”, “ Adverse Opinion ” , or “ Disclaimer of Opinion ”  Must use the phrases-“ with the foregoing explanation ” or “ subject to ” or “ except that”  Where a qualified opinion is issued due to material misstatement the auditor shall state in the opinion paragraph that except for the matters described in the basis of qualified opinion, the financial statements have been prepared, in all material respects, in accordance with the applicable financial reporting framework  When modification arises from inability to obtain sufficient appropriate audit evidence, the auditor shall use the corresponding phrase “ except for the possible effects of the matter(s) … ” or the modified opinion

Form and Content of Modified Report (Contd..)  When issuing an adverse opinion, the auditor shall state  That the financial statements DO NOT PRESENT a true and fair view; or  The financial statements have NOT been prepared, in all material respects, in accordance with the applicable financial reporting framework

 When the auditor disclaims an opinion due to inability to obtain sufficient appropriate audit evidence, he shall state:  Because of the significance of the matter (s) described in the Basis for Disclaimer of opinion paragraph ,the auditor has NOT been able to obtain sufficient appropriate audit evidence therefore The auditor does NOT express an opinion on the financial statements

Examples of Qualified Opinion  Basis of 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 sub-section (3C) of section 211 of the Act. 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, except for the 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 a true and fair view in conformity with the accounting principles generally accepted in India”

Examples of Adverse Opinion  Basis of Adverse Opinion “ As explained in Note X, the Company has not consolidated the financial statements of subsidiary XYZ Company it acquired during 20XX because it has not yet been able to ascertain the fair values of certain of the subsidiary’s material assets and liabilities at the acquisition date. This acquisition is therefore accounted for as an investment. Under the accounting principles generally accepted in India, the subsidiary should have been consolidated because it is controlled by the Company. Had XYZ been consolidated, many elements in the accompanying financial statements would have been materially affected. The effects on the financial statements of the failure to consolidate have not been determined”.

 Adverse Opinion “In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the consolidated financial statements do not give a true and fair view in conformity with the accounting principles generally accepted in India”

Examples of Disclaimer of Opinion  Basis of Disclaimer of Opinion “The Company’s investment in its joint venture XYZ Company is carried at Rs. XXX in the Company’s Balance Sheet, which represents over 90% of the Company’s net assets as at March 31, 20XX. We were not allowed access to the management and the auditors of XYZ Company. As a result, we were unable to determine whether any adjustments were necessary in respect of the Company’s proportional share of XYZ Company’s assets that it controls jointly, its proportional share of XYZ Company’s liabilities for which it is jointly responsible, its proportional share of XYZ Company’s income and expenses for the year, and the elements making up the Cash Flow Statement”.

 Disclaimer of Opinion “ Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.”

SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Form of Audit Report Types of paragraph  Emphasis of Matter  Paragraph in the Audit Report  On a matter that is appropriately presented or disclosed in Financial Statements.  Insertion of an emphasis of matter paragraph in the Auditor’s Report does not make the opinion “modified”  An Emphasis of Matter paragraph is not a substitute for either the auditor expressing a qualified opinion or an adverse opinion, or disclaiming an opinion  An emphasis of matter is not a part of the audit opinion at all. It is a separate, independent paragraph designed to provide “additional communication” to the users

 Other paragraphs  Paragraph in the Audit Report that refers to a matter other than those presented or disclosed in Financial Statements.

Emphasis of Matter Paragraph  An emphasis of matter paragraph is useful when the auditor, having formed an opinion, intends to draw the attention of the users to :  A matter, though appropriately presented and disclosed, is of fundamental importance to the users to understand the financial statements;

 Any other matter relevant to the users’ understanding of the audit, auditor’s responsibility or Auditor’s Report.

 Where an emphasis of matter paragraph is required by any other auditing standard, the disclosure shall be as per this SA.

 Such a paragraph shall refer to information presented and disclosed in financial statements.

 The auditor should have obtained sufficient appropriate audit evidence that the matter is not materially misstated.

Emphasis of Matter Paragraph (Contd..)

 The emphasis of matter paragraph shall be placed immediately after the Opinion paragraph in the Auditor’s Report under the heading “Emphasis of Matter Paragraph”

 Include a clear reference to the matter being emphasized and to the relevant disclosures

 Indicate that the Auditor’s opinion is NOT modified by using words like “ Without qualifying our opinion” or “Our report is not qualified on this account”

Emphasis of Matter Paragraph (Contd..) Examples when an emphasis of matter paragraph is to be included:  An uncertainty relating to the future outcome of an exceptional litigation or regulatory action  Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date  A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position

Emphasis of Matter Paragraph (Contd..) Emphasis of Matter” “We draw attention to Note XX of Schedule XX to the financial statements stating that the Company has paid Rs. xx Crores under protest against claims of Rs. xx Crores for expenses which the Company has disputed in matters that are in various stages of litigation. Pending resolution of these disputes by the relevant courts, these expenses have been accounted for in the May 11, 2013 financial statements based on the management’s expectation of the amounts due. Our opinion is not qualified in respect of this matter.”

Other Matter  An Other Matter paragraph may be required to enhance users’ understanding of an audit  Examples:–

Relevant to Users’ Understanding of the Auditor’s Responsibilities or the Auditor’s Report

–

Reporting on more than one set of financial statements

–

Restriction on distribution or use of the Auditor’s Report

 Specimen:“We did not audit the financial statements of certain subsidiaries, whose financial statements reflect total assets (net) of Rs. XXXX as at March 31, 20XX, total revenues of Rs. XXXX and net cash outflows amounting to Rs. XXXX for the year then ended. These financial statements have been audited by other auditors whose reports have been furnished to us by the Management, and our opinion is based solely on the reports of the other auditors. Our opinion is not qualified in respect of this matter”

Other Matter (Contd..) Place of Other Matter:Depends on the nature of the information to be communicated If the other matter pertains to the audit, the auditor’s responsibility or the auditor’s report insofar as

Where placed in auditor’s report?

Expressing an opinion on the financial statements

Placed immediately below the Emphasis of Matter paragraph

Other reporting responsibilities of the auditor (eg. Reporting under CARO)

Included in the section titled: “Report on Other Legal and Regulatory Requirements:

Caro 2015 ∗ On 8th April 2015 the ICAI made an announcement relating to CARO reporting. It said inter-alia “Accordingly, it may be noted that as when an Order is notified by the Central Government under section 143(11) of the Companies Act, 2013, the members would be required to report thereon as a part of their statutory audit reports.  Until the aforesaid Order is issued, no additional reporting under section 143(11) of the Companies Act, 2013 is required by the Auditors for the financial year 2014-15. “

∗ Promptly within two days the MCA notified COMPANIES ( AUDITORS REPORT) 2015- CARO 2015 on 10th April 2015.

CARO 2015 ∗ As per the information available with me the CARO 2015 is yet to be published in the official gazette. It becomes effective from the date of its publication in the official gazette ∗ Some Companies who had to issue reports after 10th April 2015 had issued the same incorporating the matters contained in CARO 2015 notwithstanding its publication in the official gazette ∗ The publication in the official gazette is expected anytime now and one has to keep a watch and ICAI may also make an announcement as soon as the publication is made.

Salient changes in CARO 2015 ∗ CARO 2015 has not added any further matters as compared to CARO 2003. ∗ In fact it has deleted a large number of clauses from reporting. The details of deletion are DELETION ∗ Requirement to report on substantial sale of fixed assets ∗ Loan taken from and given to 301 parties. (however the same is replaced with loans to parties covered in S189) ∗ Internal Audit requirements ∗ Pledging of shares ∗ Nidhi and Chit funds ∗ Dealing in shares ∗ Short term funds for long term purposes ∗ Preferential allotment of shares ∗ Securities created for debentures issued ∗ Money raised in public issue

Salient changes in CARO 2015… Additions / Changes ∗ Loans to parties covered in S189.( whether receipt of the principal amount and interest are also regular and if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest)

∗ Dues to Investor protection fund has been removed from statutory dues and added separately as sub-clause ∗ Inclusion of National company law tribunal, RBI or any other court in acceptance of deposit. ∗ Reference number of sections are modified wherever necessary.

Questions ?? Thank you..

ILLUS. 2 ILLUSTRATIVE FORMAT OF INDEPENDENT AUDITOR’S REPORT ON THE STANDALONE FINANCIAL STATEMENTS OF A COMPANY UNDER THE COMPANIES ACT, 2013 AND THE RULES THEREUNDER (to be added to the Appendix to SA 7001) Circumstances include the following:  Audit of a complete set of standalone general purpose financial statements of a company prepared under the Companies Act, 2013 financial reporting framework.  The terms of audit engagement reflect description of management’s responsibility for the financial statements in SA 210, Agreeing the Terms of Audit Engagement.  The independent auditor:  Has given an Unmodified Opinion in respect of the true and fair view of the financial statements; and  Has given Emphasis of Matter paragraphs in respect of: o A lawsuit against the Company, the result of which is uncertain o A “material uncertainty” relating to going concern which has been adequately disclosed in the notes to the financial statements  In addition to expressing opinion on the true and fair view of the financial statements, the auditor has other reporting responsibilities required under the Companies Act 2013 and/or other regulatory requirements, but does not have the responsibility to report on internal financial controls pursuant to section 143(3)(i) of the Companies Act 2013.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ABC COMPANY LIMITED Report on the Standalone2 Financial Statements We have audited the accompanying standalone financial statements of ABC COMPANY LIMITED (“the Company”), which comprise the Balance Sheet as at 31st March, 20XX, the Statement of Profit and Loss, the Cash Flow Statement for the year then ended, and a summary of the significant accounting policies and other explanatory information, [in which are incorporated the Returns for the year ended on that date audited by the branch auditors of the Company’s branches at (location of the branches)]3.

Management’s Responsibility for the Standalone Financial Statements The 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 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, read with Rule 7 of the Companies 1

Standard on Auditing (SA) 700, Forming An Opinion and Reporting on Financial Statements.

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Where the Company does not have any requirement to prepare consolidated financial statements under the Companies Act 2013, the word “Standalone” need not be used here. 3

Where applicable

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(Accounts) Rules, 2014. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate 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 statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these standalone financial statements based on our audit. We have taken into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made thereunder. We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and the 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 financial control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and the operating effectiveness of such controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, 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 on the standalone financial statements.

Opinion In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone 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, of the state of affairs of the Company as at 31st March, 20XX, and its profit/loss and its cash flows for the year ended on that date.

Emphasis of Matters We draw attention to the following matters in the Notes to the financial statements:

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a) Note X to the financial statements which, describes the uncertainty related to the outcome of the lawsuit filed against the Company by XYZ Company. b) Note Y in the financial statements which indicates that the Company has accumulated losses and its net worth has been fully / substantially eroded, the Company has incurred a net loss/net cash loss during the current and previous year(s) and, the Company’s current liabilities exceeded its current assets as at the balance sheet date. These conditions, along with other matters set forth in Note Y, indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. However, the financial statements of the Company have been prepared on a going concern basis for the reasons stated in the said Note. Our opinion is not modified in respect of these matters.

Other Matter4 We did not audit the financial statements/information of ________(number) branches included in the standalone financial statements of the Company whose financial statements / financial information reflect total assets of Rs.______ as at 31st March, 20XX and total revenues of Rs._______ for the year ended on that date, as considered in the standalone financial statements. The 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 these branches, is based solely on the report of such branch auditors. Our opinion is not modified in respect of this matter.

Report on Other Legal and Regulatory Requirements 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. (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.5] (c) [The reports on the accounts of the 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 report6.] (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 us7].

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Where applicable.

5

Where applicable.

6

Where applicable.

7

Where applicable.

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(e)

(f) (g)

(h)

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. The going concern matter described in sub-paragraph (b) under the Emphasis of Matters paragraph above, in our opinion, may have an adverse effect on the functioning of the Company. On the basis of the written representations received from the directors as on 31st March, 20XX taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 20XX from being appointed as a director in terms of Section 164 (2) of the Act. With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us: i. The Company has disclosed the impact of pending litigations on its financial position in its financial statements – Refer Note XX to the financial statements; [or the Company does not have any pending litigations which would impact its financial position8] ii. The Company has made provision, as required under the applicable law or accounting standards, for material foreseeable losses, if any, on long-term contracts including derivative contracts – Refer Note XX to the financial statements; [or the Company did not have any long-term contracts including derivative contracts for which there were any material foreseeable losses.9] iii. There has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company {or, following are the instances of delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company or there were no amounts which were required to be transferred to the Investor Education and Protection Fund by the Company10}.

For XYZ & Co Chartered Accountants (Firm’s Registration No.) Signature (Xxxxx X. Xxxx) (Designation11) (Membership No. XXXXX) Place of Signature: Date:

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As may be applicable.

9

As may be applicable.

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11

As may be applicable. Partner or Proprietor, as the case may be

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