CHAPTER 8 – AUDIT REPORT

SA 700- Forming an Opinion and Reporting on Financial Statements

It deals with a) the auditor’s responsibility to form an opinion on the FS & b) with the form and content of
the auditor’s report issued as a result of an audit of FS.

Objective of the Auditor

• To form an opinion on the FS based on an evaluation of the conclusions drawn from the audit evidence
obtained; and
• To express clearly that opinion through a written report.

Auditor to Obtain Reasonable Assurance – To form an Opinion

To form an opinion on whether the FS are prepared in accordance with the applicable FRF- Auditor shall
conclude whether the auditor has obtained reasonable assurance about whether the FS as a whole are free
from material misstatement, whether due to fraud or error.

That conclusion shall take into account:

a) Whether sufficient appropriate audit evidence (SAAE) has been obtained;

b) Whether uncorrected misstatements are material, individually or in aggregate;
c) The evaluations

Qualitative Aspects of the Entity’s Accounting Practices

1. Management makes number of judgements about the amounts & disclosures in the FS.
2. In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware of
possible bias in management’s judgements.
Lack of neutrality together with uncorrected misstatements causes the FS to be materially misstated.
Indicators of a lack of neutrality include the following:
i. Selective correction of misstatements brought to management’s attention during the audit.
Example: Correcting misstatements with the effect of increasing reported earnings, but not correcting
misstatements that have the effect of decreasing reported earnings
ii. Possible management bias in the making of accounting estimates.
3. SA 540 addresses possible management bias in making accounting estimates.
Indicators of possible management bias do not constitute misstatements for purposes of drawing conclusions
on the reasonableness of individual accounting estimates. They may, however, affect the auditor’s evaluation
of whether the FS as a whole are free from material misstatement

Specific Evaluations by the Auditor

In particular, the auditor shall evaluate whether:

1. The FS adequately disclose the significant accounting policies selected and applied;
2. The accounting policies selected & applied are consistent with the applicable FRF and are appropriate;
3. The accounting estimates made by management are reasonable;
4. The info. presented in the FS is relevant, reliable, comparable, and understandable;
5. The FS provide adequate disclosures to enable the intended users to understand the effect of material
transactions and events; and
6. The terminology used in the FS, including the title of each financial statement, is appropriate.
 Auditor’s report
Basic Elements of an Audit Report are given below:

[Link]: The auditor’s report shall have a title report of an independent auditor.

2. Addressee: Auditor report should be properly addressed. Addressee will be determined as per Law,
regulation or the terms of the engagement. Normally addressed to Shareholder of company or TCWG of
other entity.

3. Auditor’s Opinion: The first section of the auditor’s report is auditor’s opinion with heading “Opinion.”

• Identify the entity whose FS have been audited;

• State that the FS have been audited
• Identify the title of each statement comprising the FS
• Refer to the notes, including the summary of significant accounting policies; and
• Specify the date of, or period covered by, each financial statement comprising the FS.

E.g. We have audited the financial statements of XYZ Limited which comprise the Balance Sheet as at
31.03.2024 and the statement of Profit & Loss Account and the notes to the financial statements, including a
summary of significant accounting policies and other explanatory information

In our opinion and to the best of our information and according to the explanations given to us, the aforesaid
financial statements give the information required by the Act in the manner so required and give a true and
fair view/ present fairly, in all material respects in conformity with the accounting principles generally
accepted in India, of the state of affairs of the company as at 31.03.2024 and the Profit & Loss for the year
ending on that date.

Phrases “present fairly, in all material respects,” and “give a true and fair view” are equivalent

4. Basis for Opinion: Following to Opinion section, report shall include the heading “Basis for Opinion”, that:

a) States that the audit was conducted in accordance with SA;

b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
c) Includes statement that the auditor is independent of the entity in accordance with relevant ethical
requirements & has fulfilled other ethical responsibilities in accordance with these requirements.
d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.

E.g.: We conducted our audit in accordance with the Standards on Auditing (SAs) specified under section
143(10) of the Companies Act, 2013. Our responsibilities under those Standards are further described in the
Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent
of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of
India together with the ethical requirements that are relevant to our audit of the financial statements under
the provisions of the Companies Act, 2013 and the Rules thereunder, and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

5. Going Concern (GC): Where applicable, the auditor shall report in accordance with SA 570.

• The FS are prepared on the assumption that the entity is a going concern & will continue its operations for
the foreseeable future unless management either intends to liquidate entity or to cease operations.
• Assets & liabilities are recorded on the value that the entity will be able to realize its assets and discharge its
liabilities in the normal course of business.
 • Evaluate whether SAAE has been obtained regarding, and shall conclude on, the appropriateness of
management’s use of the going concern basis of accounting in the preparation of the FS.
• Based on audit evidences & judgement, auditor concludes that whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the entity’s ability to continue as GC.
• A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such
that, in the auditor’s judgement, appropriate disclosure of the nature and implications of the uncertainty is
necessary for:
o In the case of a fair presentation FRF, the fair presentation of the FS, or
o In the case of a compliance framework, the FS not to be misleading.

6. Key Audit Matters: For audits of complete sets of General-purpose FS of listed entities, the auditor shall
communicate key audit matters (KAM) in the auditor’s report in accordance with SA 701.

7. Responsibilities for the Financial Statements: The auditor’s report shall include a section with a heading
“Responsibilities of Management for the Financial Statements.”

This section of the auditor’s report shall describe management’s responsibility for:

(a) Preparing the FS in accordance with the applicable FRF, and for such IC as management determines is
necessary to enable the preparation of FS that are free from material misstatement, whether due to fraud or
error; and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of the going concern basis
of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern. Also,
include when the use of the going concern basis of accounting is appropriate

SA 200 explains the premise, relating to the

• Responsibilities of management and, where appropriate, TCWG, on which an audit in accordance with SAs is
conducted.
• Management and, where appropriate, TCWG accept responsibility for the preparation of the FS. Management
also accepts responsibility for such IC to enable the preparation of FS that are free from material
misstatement, whether due to fraud or error.
• The description of management’s responsibilities in the auditor’s report includes reference to both
responsibilities as it helps to explain to users the premise on which an audit is conducted.

8. Auditor’s Responsibilities for the Audit of the Financial Statements:

I. This section of the auditor’s report shall state

a) That the objectives of the auditor are to:

i. Obtain reasonable assurance about whether the FS as a whole are free from material misstatement, whether
due to fraud or error; and
ii. Issue an auditor’s report that includes the auditor’s opinion.
b) That reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with SAs will always detect a material misstatement when it exists; and
c) That misstatements can arise from fraud or error, and either:
i. Describe that they are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users; or
ii. Provide a definition or description of materiality in accordance with the applicable FRF.
 II. The Auditor’s Responsibilities for the Audit of the FS section of the auditor’s report shall further:

III. The Auditor’s Responsibilities for the Audit of the FS section of the auditor’s report also shall:

a) State that the auditor communicates with TCWG regarding, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in IC that the auditor identifies during the
audit;
b) For audits of FS of listed entities, state that the auditor provides TCWG with a statement that the auditor has
complied with relevant ethical requirements regarding independence and communicate with them all
relationships and other matters that may affect auditor’s independence.
c) For audits of FS of listed entities & any other entities for which KAM are communicated with TCWG, that were
of most significance in the audit of the FS of the current period and are therefore the KAM.

9. Location of the description of the auditor’s responsibilities for the audit of the FS:

• Within the body of the auditor’s report; or

• Within an appendix to the auditor’s report, the auditor’s report shall include a reference to the location of the
appendix or
• Where law, regulation or auditing standards expressly permit the auditor to do so- a reference within the
auditor’s report to the location on a website of an appropriate authority.

10. Other Reporting Responsibilities: Other reporting responsibilities shall be addressed in

a separate section in the auditor’s report with a heading titled
“Report on Other Legal and Regulatory Requirements”

If other reporting responsibilities are presented in the same section as the related report elements required
by the SAs, the auditor’s report shall clearly differentiate the other reporting responsibilities from the
reporting that is required by the SAs.

11. Signature of the Auditor: The report is signed by the auditor (i.e. the engagement partner) in his personal
name or personal name and in the name of the audit firm both in case of firm. Also mention the membership
number & registration number of the firm
 12. Place of Signature:

13. Date of the Auditor’s Report: Date of signing the AR. It should not be before auditor has obtained SAAE.

UDIN

An auditor is required to mention the UDIN with respect to each audit report being signed by him,
along with his membership number while signing an audit report.

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

Report
Circumstances when a Modification to the Auditor’s Opinion is required

a) Conclude based on evidences obtained that the FS as a whole are not free from material misstatement; or
b) Is unable to obtain SAAE to conclude that FS as a whole are free from material misstatement

Types of Modified Opinions:

Refer chart in complete audit process

What is do you mean by pervasive? In auditor’s judgement

• Are not confined to specific elements, accounts or items of the FS;

• If so confined, represent or could represent a substantial proportion of the FS; or
• In relation to disclosures, are fundamental to users’ understanding of the FS.

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a Management-

Imposed Limitation after the Auditor Has Accepted the Engagement

Description of Auditor’s Responsibilities in Disclaimer of Opinion

Auditor shall amend the auditor’s responsibilities required by SA 700 to include only the following:

1. A statement that the auditor’s responsibility is to conduct an audit of the entity’s FS in accordance with SAs
and to issue an auditor’s report;
2. A statement that, however, because of the matter(s) described in the Basis for Disclaimer of Opinion section,
the auditor was not able to obtain SAAE to provide a basis for an audit opinion on FS; and
3. The statement about auditor independence and other ethical responsibilities required by SA 700

Auditor to communicate with TCWG regarding expected modification and the wording of the modification

Unqualified, Qualified, Adverse and Disclaimer of opinion in Audit Report

Refer to chart given in class

SA 706 Emphasis of matter paragraphs and other matter paragraphs
(EOM) in the independent auditor’s report
Emphasis of Matter: Matter appropriately presented or disclosed in the FS that, in the auditor’s judgement,
is of such importance that it is fundamental to users’ understanding of the FS.

Other Matter: Matter other than those presented or disclosed in the FS that, in the auditor’s judgement, is
relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

EOM/OMP Paragraphs in the Auditor’s Report:

EOM shall be included provided:

1. The auditor would not be required to modify the opinion as per SA 705 as a result of the matter; and
2. When SA 701 applies, the matter has not been determined to be a KAM to be communicated in AR.

OMP shall be included provided:

1. This is not prohibited by law or regulation; and

2. When SA 701 applies, the matter has not been determined to be a KAM to be communicated in the AR.

Separate section for Emphasis of Matter paragraph & Other Matter paragraph

When EOM is included, Auditor shall:

1. Include the paragraph within a separate section of the auditor’s report heading “Emphasis of Matter”;
2. Include in the paragraph the matter being emphasized & where relevant disclosures that fully describe the
matter can be found in FS. It shall refer only to information presented or disclosed in the FS; and
3. Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

When OMP is included, Auditor shall include the paragraph within a separate section with the heading “Other
Matter,” or other appropriate heading.

Inclusion of an EOM paragraph in the auditor’s report does not affect the auditor’s opinion

EOM does not substitute:

a) A modified opinion in accordance with SA 705

b) Disclosures in the FS that the applicable FRF requires management to make achieve fair presentation
c) Reporting as per SA 570 when a material uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern.

Auditor to communicate with TCWG regarding this expectation and the wording of EOM & OMP para
 SA 701 Communicating key audit matters in the independent auditor’s
report
Those matters that, in the auditor’s professional judgement were of most significance in the audit of the FS
of the current period. KAM are selected from matters communicated with TCWG.

Purpose of KAM

▪ To enhance communicative value of the auditor’s report by providing greater transparency about the audit
▪ Communicating KAM provides additional information to intended users of FS to assist them in understanding
those matters that, in auditor’s professional judgement, were of most significance.
▪ Communicating KAM may also assist intended users in understanding the entity & areas of significant
management judgement in the audited FS.

Determining Key Audit Matters

The auditor shall determine, from the matters communicated with TCWG, those matters that required
significant auditor attention in performing the audit. Auditor shall take into account the following

• Areas of higher assessed ROMM, or significant risks identified in accordance with SA 315
• Significant auditor judgements relating to areas in the FS that involved significant management judgement,
including accounting estimates having high uncertainty.
• The effect on the audit of significant events or transactions that occurred during the period

Communicating Key Audit Matters

Each KAM, 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:

1. KAM are those matters that, in the auditor’s professional judgement, were of most significance in the audit
of the FS of the current period; and
2. These matters were addressed in the context of the audit of the FS as a whole, and in forming the auditor’s
opinion thereon, and the auditor does not provide a separate opinion on these matters

Communicating Key Audit Matters- not a substitute for disclosure in the Financial Statements etc.

1. Not a substitute for disclosures in the FS that the applicable FRF requires
2. Not a substitute for the auditor expressing a modified opinion as per SA 705;
3. Not a substitute for reporting in accordance with SA 570 when a material uncertainty exists
4. Not a substitute for a separate opinion on individual matters.

Communication with Those Charged with Governance

• Those matters the auditor has determined to be the KAM; or

• If applicable, auditor’s determination that there are no KAM to communicate in the auditor’s report

SA 710 Comparative information-corresponding figures and

comparative financial statements
Objective

• To obtain SAAE about whether the comparative information has been presented, in all material respects, as
per applicable FRF; and
• To report in accordance with the auditor’s reporting responsibilities.
 Comparative Information:

Amounts & disclosures included in the FS in respect of one or more prior periods.

Nature of Comparative Information

• For corresponding figures, the auditor’s opinion on the FS refers to the current period only; whereas
• For comparative financial statements, the auditor’s opinion refers to each period for which FS are presented

The approach to be adopted is often may be specified by law/regulation or terms of engagement.

Audit Procedures regarding Comparative Information

• For inclusion comparative information, the auditor shall evaluate whether:

a) It agrees with the amounts & other disclosures presented in the prior period; and
b) The accounting policies in comparative information are consistent with the current period
c) If change in A/c policy, whether changes properly accounted & adequately presented and disclosed
• If there is possibility of Material misstatement in comparative info., perform additional procedure to obtain
SAAE to determine whether a material misstatement exists.
• Obtain written representations for all periods referred in the auditor’s opinion. Also obtain a specific WR for
any prior period item separately disclosed in the current year’s statement of profit & loss.

Meaning & Audit reporting regarding Corresponding Figures

• Where amounts & other disclosures for prior period are included as integral part of the current period FS
• and are intended to be read only in relation to the amounts & disclosures relating to the current period.
• The level of detail presented in the corresponding amounts & disclosures is dictated primarily by its relevance
to the current period figures

When corresponding figures are presented, the auditor’s opinion shall not refer to the corresponding
figures except in the following circumstances:

1. When previous audit report i.e. auditor’s report on prior period, is a qualified/ disclaimer/ adverse
opinion and the matter which gave rise to the modification is unresolved, the auditor shall modify the
auditor’s opinion on the current period’s FS. In the Basis for Modification paragraph, the auditor shall either:

A. Refer to both the period figures in the description of the matter giving rise to the modification if matter is
material in current year figures; or
B. In other cases, explain that the audit opinion has been modified because of the effects or possible effects of
the unresolved matter on the comparability of the both period figures.

2. If the auditor obtains audit evidence that a material misstatement exists in the prior period financial
statements

Unmodified opinion previously: Misstatement dealt with applicable FRF, if not corrected>> qualified /adverse
opinion in Current period.

3. Prior Period Financial Statements Not Audited-

State in OMP that the corresponding figures are unaudited. It doesn’t relive auditor to obtain SAAE that
opening balances do not contain material misstatement affecting current period FS.

Comparative Financial Statements

Where amounts and other disclosures for the prior period are included for comparison with the FS of the
current period but, if audited, are referred to in the auditor ’s opinion. The level of information included in
comparative FS is comparable with that of the FS of the current period
• Auditor’s opinion shall refer to each period for which FS are presented & on which an audit opinion is
expressed.
• If opinion on Prior period differs from the opinion the auditor previously expressed, disclose reason for the
different opinion in an OMP as per SA 706.
• If prior period audit is done by predecessor auditor & Auditor concludes material misstatement exist affecting
prior period FS on which predecessor auditor had previously reported without modification, auditor to
comminate to mgmt. and TCWG & request that the predecessor auditor be informed.
If prior period FS amended predecessor auditor agrees to issue a new auditor’s report, Auditor to report only
on the current period
• If prior period FS not audited, state in OMP that the Comparable FS are unaudited. It doesn’t relive auditor to
obtain SAAE that opening balances do not contain material misstatement affecting current period FS.

AUDIT OF BRANCH OFFICE ACCOUNTS

As per section 128(1) of the Companies Act, 2013, every company shall prepare and keep
at its registered office books of account and other relevant books and papers and financial
statement for every financial year which give a true and fair view of the state of the affairs
of the company, including that of its branch office or offices, if any, and explain the
transactions effected both at the registered office and its branches and such books shall be
kept on accrual basis and according tothe double entry system of accounting.
Section 143(8) specifies that where a company has a branch office, the accounts of that office shall be
audited either by the auditor appointed for the company (principal auditor) under this Act or by any other
person qualified for appointment as an auditor of the company under this Act and appointed as such
under section 139.

Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the branch
auditor shall submit his report to the company’s auditor and reporting of fraud by the auditor
shall also extend to such branch auditor to the extent it relatesto the concerned branch.

Using the Work of another Auditor: When the accounts of the branch are audited by a person other than
the company’s auditor (or principal auditor), there is need for a clear understanding of the role of such
other auditor and the company’s auditor in relation to the audit of the accounts of the branch and the
audit of the company as a whole; also, there is great necessity for a proper rapport between these two
auditors for the purpose of an effective audit.

SA 600, Using the Work of another Auditor makes clear that principal auditor has the right to visit a
component and examine the books of account and other records of the said component. Where another
auditor has been appointed for the component, the principal auditor would normally be entitled to rely
upon the work of such auditor unless there are special circumstances.

When using the work of another auditor, the principal auditor should ordinarily perform the
following procedures:

• Advise the other auditor of the use that is to be made of the other auditor's work and
report and make sufficient arrangements for co-ordination of their efforts at the
planning stage of the audit.
• Advise the other auditor of the significant accounting, auditing and reporting
requirements and obtain representation as to compliance with them.
 Joint Audit
Meaning: Audit of financial statements of an entity by two or more auditors.
Responsibilities [Joint & Several responsibilities of Joint Auditors]:
• The audit work (Not divided among the joint auditors) – Carried out by all joint auditors.
• Examining that the financial statements of the entity comply with the requirements of the relevant
statutes.
• Decisions under audit planning in respect of common audit areas – Took by all the joint auditors.
• Presentation and disclosure of the financial statements as required by the applicable FRF;
• Matters brought to the notice of the joint auditors by any one of them + there is an agreement
among the joint auditors on such matters.
• Audit report complies with the requirements of the relevant statutes + applicable SAs + other
relevant pronouncements issued by ICAI.
Planning:
➢ Before the commencement of the audit – Joint auditors to discuss & develop a Joint Audit Plan.
➢ Engagement partner + Other Key Members of the Engagement Team will also be involved in the audit
planning.
➢ Joint auditors will establish of an overall audit strategy and also set the scope, timing and direction of the
audit and also guides the development of the audit plan.
➢ For developing the joint audit plan, the joint auditors should:
▪ identify the division of audit areas and common audit areas;
▪ ascertain the reporting objectives of the engagement;
▪ consider and communicate among all joint auditors the significant factors;
▪ directing the engagement team’s efforts;
▪ consider the results of preliminary engagement activities.
▪ ascertain the nature, timing and extent of resources to accomplish the engagement.
➢ Consider and assess the risks of material misstatement + communicate to other joint auditors.
➢ Joint auditors to discuss and document the nature, timing, and extent of the audit procedures for common
and specific allotted areas of audit. Work allocation document to be signed by all the joint auditors +
Communicated to TCWG.
➢ Joint auditors to obtain a Common Engagement Letter + Common Management Representation Letter.

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.
➢ Sec. 143 (1): Auditor will inquire in these matters
▪ Loans and advances made by the company on the basis of securities have been properly secured.
▪ Transactions represented by book entries are prejudicial to the interests of the company.
▪ A company (not an Investment/Banking company) sold its shares/debentures/other securities at a price less
than the purchase price.
▪ Loans and advances made by the company shown as deposits.
▪ Personal expenses charged to the revenue account.
▪ Position of cash received against the allotment of shares.
➢ Sec. 143 (2): Duties of reporting
▪ Duty to report to the members of the company on the accounts examined + Financial statements to be
laid at the general meeting.
▪ While making the report – Auditor to consider the provisions of the Act + AS + SA.
➢ Sec. 143 (3): Matters to be reported in Audit Report
a) Obtained all the necessary information & explanations to the best of his knowledge.
b) Books of accounts + Returns of the Branches not visited by the auditor – Properly kept by the company.
c) Report on accounts of any branch office audited by a person other than the company’s auditor has been sent
to him.
d) Company’s BS and P&L A/c corresponding with the books of accounts and returns.
e) Financial statements comply with AS.
f) Observations/Comments of the auditors on financial transactions/matters having any adverse effect on the
company.
g) State the reasons for qualifications in Qualified Report or negative report.
h) Any director disqualified under Section 164.
i) Reporting on Internal Financial Controls (IFC) of the company. Reporting on IFC is applicable to all companies
except the following:
• OPC
• Small companies
• Private companies (Turnover of < ₹50 crores (as per latest audited FS) + Aggregate borrowings from
banks/FIs/body corporates of < ₹25 crores at any point in time during the financial year)
j) Rule 11 of CAAR, 2014 (Report in audit report if not reported by company in its FS):
▪ Disclosed the impact of pending litigations on its financial position.
▪ Made provision (reqd. by any law/AS) for foreseeable material losses.
▪ Any delay in transferring amounts to the IEPF.
▪ The company has lent money/recd. money for investment in a third party (Ultimate Beneficiary). See diagram.
▪ Dividend declared/paid during the year by the company.
▪ Used accounting software with audit trail feature

CARO 2020- Notes given in class