December 2021

Statutory audit of a public company implies the audit of the transactions of the company which are the subject-matter of the report under section 165(4). The auditor, however, has to certify as correct only as much of the Statutory Report as relates to the shares allotted by the company, cash received in respect of such shares and other receipts and payments of the company. The auditor, therefore, must:  examine the internal check with regard to the control over amounts collected; and  study the Memorandum, Articles of Association and the Prospectus for ascertaining the amount of authorised capital, its composition, terms of issue, particulars of any underwriting contract entered into, the rate of underwriting commission, shares agreed to be issued for consideration other than cash and particulars of important agreements entered into by the company. In addition, he should carry out an audit of the issue of shares. The undermentioned steps are also necessary : (1) Vouch the payment of the underwriting commission. (2) Vouch the brokerage paid on issue of shares by examining the applications and confirming that they bear the stamps of the brokers or agents to whom brokerage has been paid. Refer to minutes of the Directors authorising the payment of such brokerage. Also see that the provisions of section 76 have not been contravened. (3) Vouch the payment of Preliminary Expenses and see that the amount paid does not exceed the amount fixed by the Articles or the Prospectus. (4) Vouch all other receipts and payments of the company up to date within seven days of the report; pay special attention to receipts and payments on capital account, e.g., sale proceeds of assets acquired from the vendor of the business, payments made to him, purchase of fixed assets, etc. (5) Check in detail amounts deposited in the bank and withdrawals thereof with the entries in the Bank Pass Book. Obtain a certificate from the Bank as to the bank balance as at the date upto which the Statutory Report has been prepared. (6) Verify that the amounts receivable and payable which have been adjusted in the books of account but have been excluded from the balance of receipts and payments. The statutory audit culminates in the preparation of the Statutory Report. Its main content, with which the audit is concerned, is the Abstract of Receipts and payments made upto a date within 7 days of the report, exhibiting under distinctive heads, receipts of the company from shares, debentures and other sources, payment made and balance left in hand. The Statutory Report is required to be certified by the auditors of the company, in so far as the report relates to shares allotted by the company, cash received in respect of which the checking of accounts, as per details given above, has been carried out.

It is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company. According to sub-section (2) of section 233(B), a cost auditor shall be appointed by the Board of Directors of the company in accordance with the provisions of sub-section (1B) of section 224 and with the previous approval of the Central Government. Further it has been provided that before the appointment of any cost auditor is made by the Board a written certificate shall be obtained by the Board from the auditor proposed to be so appointed to the effect that the appointment, if made, will be in accordance with the provisions of sub-section (1B) of section 224. Such a company is required under clause (d) of sub-section (1) of section 209 of the Act to include in its books of account, the particulars referred to therein. The cost audit is in addition to, and independent of the normal financial audit carried out pursuant to the appointment under section 224 of the Act. The cost auditor shall have the same powers and duties as are prescribed under section 227(1) of the Act for the auditors appointed under section 224. Qualification of a Cost Auditor – Under the provisions of section 233B such an audit is to be conducted by a Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959 Disqualification for a cost auditor – These are the following :  Disqualifications contained in sections 226(3) and 226(4) of the Act. Holding appointment as the statutory auditor under section 224 of the Act. On becoming subject to any of the disqualifications mentioned in 1 and 2 and above after being appointed as the cost auditor. According to sub-section (1) of section 233(B), the auditor appointed under that section is expected to conduct the audit in such manner as may be specified in the order issued by the Central Government. Further, as required by sub-section (4), the cost auditor must forward his report to the Central Government and to the company which 120 days of the closing of the year to which the audit related. The report is to be given in the form prescribed for the purpose. The Central Government has issued Cost Audit (Report) Rules, 1968 specifying the form of the report and the additional information which should be included therein in the form of annexure. The rules have also set down the various points on which the auditor should make his observations and give his conclusions. The rules have been superceded by a Cost Audit (Report) Rules, 2001. The auditor must further report on the adequacy of cost accounting records maintained by the company as prescribed by the Government under section 209(1)(d) of the Act to confirm that they give a true and fair view of the cost of production processing, manufacturing, or mining activities, as the case may be. If there is any additional information that auditor would like to furnish, he may include in the annexure to the report. The Government has issued notification under section 209(1)(d) for various industries. With each notification a Schedule is attached containing detailed items under which the cost of production must be analysed to arrive at the total cost. Each industry concerned is expected to complete theschedule within three months from the expiration of the last date of the period to which it relates. It is the duty of the cost auditor to report on the correctness of the figures given in the schedule. Some of theindustries covered by the Cost (Records) Rules, issued under section 209(1)(d) are as under :  cement or clinker or both;  cycles and components thereof;  caustic soda;  rubber tyres or tubes or both; refrigerators; storage batteries used in automobiles;  electric lamps or fluorescent tubes or bulbs;  room air conditioners;  motor vehicles;  electric fans;  electric motors;  tractors;  bulk drugs;  vanaspati;  infant milk food; steel tubes and pipes;  power-driven pumps;  diesel engines; and  electric cables and conductors. The Government’s view, so far as it can be ascertained from the pronouncement is that cost audit will not be required annually but only for the financial year or years specified in the order. The copy of the cost audit report sent to the Central Government should be sent to the company concerned simultaneously. The company shall within 30 days, from the date of the receipt of the copy of report, furnish the Central Government with full information and explanations on every reservation or qualification contained in such report. The Central Government, after consideration of the report and the information and the explanations furnished by the company, may seek further explanation from the company if it so needs. The Central Government may direct the company concerned to circulate to its members along with the notice of the annual general meeting to be held for the first time after submitting of the relevant cost audit report, the whole or part of the report as it may specify.

Section 233 A empowers the Central Government, in certain cases, to call for a ‘special audit’. Such an audit may be required where the Central Government has reasons to believe:  that the affairs of the company are not being managed on sound business principles or according to prudent commercial practices; or that the company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business to which it pertains; or  that the financial position of the company is such as might endanger its solvency. Such an audit aims at providing the Government with a critical appreciation of the company and its financial position. The audit may be conducted either by the company’s auditor or another chartered accountant who may or may not be engaged in a practice, appointed by the Central Government [Sections 233(1) and (2)]. The auditor so appointed has the same powers and duties in the matter of special audit as the statutory auditor of a company has under section 227, except for the fact that he must report to the Central Government in place of the members of the company [Sub-section (3)]. The special auditor’s report must include, as far as may be practicable, all the matters required to be included in a normal auditor’s report under section 227 and where the Central Government so directs, also a statement on any matters which may be referred to him by that Government [Sub-section (4)]. With a view to facilitating the work of the auditor the Central Government may serve an order to furnishto him all such information as he may be in need of non-compliance with such an order of the government shall render the defaulter punishable with a fine extending to Rs. 500 [Sub-section (5)]. On receipt of the report, the Central Government may take such action as circumstances might warrant, according to the provisions of the Act or any other law for the time being in force. In case the Central Government does not take any action within four months from the receipt of the report, it must send the report to the company either to circulate the copy or the extracts among the members or to get it read before the company at its next general meeting [Sub-section (6)]. The expenses of or incidental to a special audit, including the remuneration of the special auditor as fixed by the Central Government (and its decision in this regard is final), must be paid by the company. If the company defaults in making the payment, the amount can be recovered from the company as arrears of land revenue [Sub-section (6)].

The practice of appointing Chartered Accountants as joint auditors is quite widespread in big companies and corporations. Joint audit basically implies pooling together the resources and expertise of more than one firm of auditors to render an expert job in a given time period which may be difficult to accomplish acting individually. It essentially involves sharing of the total work. This is by itself a great advantage. In specific terms the advantages that flow may be the following:  Sharing of expertise  Advantage of mutual consultation Lower workload  Better quality of performance  Improved service to the client  Displacement of the auditor of the company taken over in a take – over often obviated,  In respect of multi-national companies, the work can be spread using the expertise of the local firms which are in a better position to deal with detailed work and the local laws and regulations.  Lower staff development costs.  Lower costs to carry out the work.  A sense of healthy competition towards a better performance. The general disadvantages may be the following: The fees being shared. Psychological problem where firms of different standing are associated in the joint audit.  General superiority complexes of some auditors.  Problems of co-ordination of the work. Areas of work of common concern being neglected.  Uncertainty about the liability for the work done. With a view to providing a clear idea of the professional responsibility undertaken by the joint auditors, the Institute of Chartered Accountants of India had issued a statement on the Responsibility of Joint Auditors which now stands withdrawn with the issuance of AAS 12, “Responsibility of Joint Auditors” w.e.f. April, 1996. It requires that where joint auditors are appointed, they should, by mutual discussion, divide the audit work among themselves. The division of work would usually be in terms of audit of identifiable units or specified areas. In some cases, due to the nature of the business of the entity under audit, such a division of work may not be possible. In such situations, the division of work may be with reference to items of assets or liabilities or income or expenditure or with reference to periods of time. Certain areas of work, owing to their importance or owing to the nature of the work involved, would often not be divided and would be covered by all the joint auditors. Further, it states that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated tonhim, whether or not he has prepared a separate report on the work performed by him. On the other hand, all the joint auditors are jointly and severally responsible –  in respect of the audit work which is not divided among the joint auditors and is carried out by all of them;  in respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the audit procedures to be performed by any of the joint auditors. It may, however, be clarified that all the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing or extent of the audit procedures agreed upon among them; proper execution of these audit procedures is the separate and specific responsibility of the joint auditor concerned;  in respect of matters which are brought to the notice of the joint auditors by any one of them and on which there is an agreement among the joint auditors;  for examining that the financial statements of the entity comply with the disclosure requirements of the relevant statute; and  for ensuring that the audit report complies with the requirements of the relevant statute. If any matters of the nature referred to in paragraph 4 above are brought to the attention of the entity or other joint auditors by an auditor after the audit report has been submitted, the other joint auditors would not be responsible for those matters.

The accounts of the branch office of a company are required to be audited either by the company’s auditor appointed under section 224 or by a person qualified for appointment as contemplated by section 226 or, where the branch office is situated in a foreign country, either by the company’s auditor or by a person qualified as aforementioned or by an accountant duly qualified to act as an auditor in accordance with the laws of that foreign country [section 228(1)]. In case they are audited by a person other than the company’s auditor, the latter would have a right to visit branch office, if necessary, and also to have access at all times to the books and accounts and vouchers maintained at the branch office except in the case of a banking company having foreign branch office, in which case it would be sufficient if the auditor of the company is allowed access to such copies of and extracts from the books and accounts of the branch as have been transmitted to the head office in India [section 228(2) and proviso therein]. A company may at general meeting decide whether it shall have accounts of its branch office audited by a person other than the company’s auditor. Upon such a decision being taken, the company may either appoint a person who may be a person qualified under section 226 or, in the case of a foreign branch a person qualified according to the laws of that country to audit the accounts of the branch or authorise the Board of Directors to appoint such an auditor in consultation with the company’s auditor. The auditor so appointed in either case will have the same powers and duties as the statutory auditor and will be paid such remuneration as the company in general meeting or the Board may fix. It will be the duty of the branch auditor to prepare a report on the accounts of the branch office examined by him and to forward the same to the company’s auditor who shall, while preparing his report deal with the same in such manner as he considers necessary [section 228(3)]. When the accounts of the branch are audited by a person other than the company’s auditor, there is need for a clear understanding of the role of such 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. In recognition of these needs, the Council of the Institute of Chartered Accountants of India have dealt with these issues in AAS 10, “Using the Work of Another Auditor” . It makes clear that in certain situations, the statute governing the entity may confer a right on the principal auditor to visit a component and examine the books of account and other records of the said component, if he thinks it necessary to do so. 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 to make it essential for him to visit the component and/or to examine the books of account and other records of the said component. 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, in the context of the specific assignment. 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. The principal auditor would inform the other auditor of matters such as areas requiring special consideration, procedures for the identification of inter-component transactions that may require disclosure and the time-table for completion of audit; and  advise the other auditor of the significant accounting, auditing and reporting requirements and obtain representation as to compliance with them. The principal auditor might discuss with the other auditor the audit procedures applied or review a written summary of the other auditor’s procedures and findings which may be in the form of a completed questionnaire or check-list. The principal auditor may also wish to visit the other auditor. The nature, timing and extent of procedures will depend on the circumstances of the engagement and the principal auditor’s knowledge of the professional competence of the other auditor. This knowledge may have been enhanced from the review of the previous audit work of the other auditor. Exemptions to Branches: To prevent any hardship, the Central Government has been empowered to make Rules so as to exempt branch offices from audit to extent as is specified in the Rules [section 228(4)]. In exercise of the powers conferred by section 228(4) the Central Government has framed certain rules, entitled. “The Companies (Branch Audit Exemption) Rules, 1961”. These rules are summarised below : (1) Exemption based on quantum of activity – If a company, carrying on any manufacturing, processing or trading activity, has a branch office whose average of the ‘quantum of activity’ i.e.  the aggregate value of the goods and articles produced, manufactured or processed, or  the aggregate value of the goods or articles sold and of service rendered, or the amount of the expenditure, whether of a revenue or capital nature, incurred by a branch office of a company during a financial year, (i.e., the financial year of the company in respect of which exemption from branch audit is to be determined) does not exceed Rs. 2 lakhs or 2% of the average of the total turnover of the company including all its branches and other offices and the earnings from services rendered and from any source during the same period,

In terms of the general principles of law, any person having the lawful possession of somebody else’s property, on which he has worked, may retain the property for non-payment of his dues on account of the work done on the property. On this premise, auditor can exercise lien on books and documents placed at his possession by the client for non payment of fees, for work done on the books and documents. The Institute of Chartered Accountants in  and Wales has expressed a similar view on the following conditions : Documents retained must belong to the client who owes the money.  Documents must have come into possession of the auditor on the authority of the client. They must not have been received through irregular or illegal means. In case of a company client, they must be received on the authority of the Board of Directors. The auditor can retain the documents only if he has done work on the documents assigned to him.  Such of the documents can be retained which are connected with the work on which fees have not been paid. Under section 209 of the Act, books of account of a company must be kept at the registered office. These provisions ordinarily make it impracticable for the auditor to have possession of the books and documents. However, in both the Acts, further provisions are there under which books of account could be kept at a different place, pursuant to a Board resolution of which notice must be given to Registrar of Companies. If in a company Board passes such a resolution and hands over the books of account to the auditor and makes the necessary notification to the Registrar the auditor may in such circumstances, exercise the right of lien for non-payment of fees. However, as per section 209 he must provide reasonable facility for inspection of the books of account by directors and others authorised to inspect under the Act. Taking an overall view of the matter, it seems that though legally, auditor may exercise right of lien in cases of companies, it is mostly impracticable for legal and practicable constraints. His working papers being his own property, the question of lien, on them does not arise. AAS 3 issued by ICAI on Documentation also states that, “working papers are the property of the auditor. The auditor may at his discretion make portions of or extracts from his working papers available to his clients. The auditor should also adopt reasonable procedures for custody and confidentiality of his working papers and should retain them for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional requirements of record retention”.

As laid down by section 229 of the Companies Act, 1956 only the person appointed as the auditor of the company or where a firm is so appointed, only a partner in the firm practising in India may sign the auditor’s report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor. The Department of Company Affairs, Government of India, in a communication dated 29th July, 1972 has expressed the view that when a single chartered accountant is practising, there cannot be any question of any firm name. Further it is stated that section 229 of the Act clearly provides that if a firm of chartered accountants is appointed as auditor, only a partner in the firm may sign the auditor’s report or sign or authenticate any other document required by law to be signed by the auditor. The practice of merely affixing the ‘firm name’ on the report or such other document is not correct in the eyes of law. In the Department’s view, the partner concerned should invariably sign in his own hand for and on behalf of the firm appointed to audit and the company’s accounts. The practice of a separate disclosure to the Registrar of Companies about the identity of the partner of a firm the name of which is affixed to the auditor’s report and other documents annexed thereto would not suffice and is not a procedure contemplated by the statute. Penalty for non-compliance – If any auditor’s report or any document of the company is signed or authenticated otherwise than in conformity with the requirements of section 229, the auditor concerned and the person, if any, other than the auditor who signs the report or signs or authenticates the document shall, if the default is wilful, be punishable with a fine which may extend upto Rs. 10,000/- (section 233). Reading and inspection of auditor’s report – The auditor’s report must be read before the shareholders of the company in general meeting and should be kept open for the inspection of every member of the company (section 230). It is no part of duty of the auditor either to send a copy of his report to or allow inspection thereof by each member of the company individually or to see that the report is read before the company in general meeting. For non-compliance with any of the requirements of sections 225 to 231, the company, and every officer of the company who is in default, will be liable to a fine which may extend up to Rs. 5000/- (section 232). In Re Allen Craig & Co. (London) Ltd. 1934, it was held that the duty of the auditors, after having signed the report to be annexed to a balance sheet, is confined only to forwarding that report to the secretary of the company. It will be for the secretary or the directors to convene a general meeting and send the balance sheet and report to members (or other persons) entitled to receive it.

SPECIMEN AUDITOR’S REPORT TO THE MEMBERS OF THE COMPANY The Members of ………………(name of the Company)1 1. We have audited the attached balance sheet of ………………. (name of the company), as at 31st March 20XX, the profit and loss account and also the {cash flow statement}2 for the year ended on that date annexed thereto. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We conducted our audit in accordance with the auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. As required by the Companies (Auditor’s Report) Order, 20033 issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Companies Act, 1956, we enclose in the Annexure4 a statement on the matters specified in paragraphs 4 and 5 of the said Order. 4. Further to our comments in the Annexure referred to above, we report that: We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;  In our opinion, proper books of account as required by law have been kept by the company so far as 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. The Branch Auditor’s Report(s) have been forwarded to us and have been appropriately dealt with)5;  The balance sheet, profit and loss account and {cash flow statement}6 dealt with by this report are in agreement with the books of account (and with the audited returns from the branches)7; 1 Reference may also be made to the Auditing and Assurance Standard (AAS) 28, The Auditor’s Report on Financial Statements, Statement on Qualifications in the Auditor’s Report and the Guidance Note on Section 227(3)(e) and (f) of the Companies Act, 1956, issued by the Institute of Chartered Accountants of India. 2 Wherever applicable. 3 All references made in this Specimen Auditor’s Report to Companies (Auditor’s Report) Order, 2003 should be construed as being to the Companies (Auditor’s Report) Order, 2003 as amended by Companies (Auditor’s Report) (Amendment) Order, 2004. 4 Alternatively, instead of giving the comments on Companies (Auditor’s Report) Order, 2003 in an Annexure, the comments may be contained in the body of the main report. 5. In our opinion, the balance sheet, profit and loss account and {cash flow statement}8 dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956; 6. On the basis of written representations received from the directors, as on 31st March 20XX and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31st March 20XX from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956; 7. In our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:  in the case of the balance sheet, of the state of affairs of the company as at 31st March 20XX;  in the case of the profit and loss account, of the profit/loss9 for the year ended on that date; and  {in the case of the cash flow statement, of the cash flows for the year ended on that date.}10 For ABC and Co. Chartered Accountants Signature (Name of the Member Signing the Audit Report) (Designation)11 Membership Number Place of Signature Date Re:…………………Limited Referred to in paragraph 3 of our report of even date, 1.  The company has maintained proper records showing full particulars including quantitative details and situation of fixed assets.  All the assets have not been physically verified by the management during the year but there is a regular programme of verification which, in our opinion, is reasonable having regard to the size of the company and the nature of its assets. No material discrepancies were noticed on such verification.  During the year, the company has disposed off a substantial part of the plant and machinery. According to the information and explanations given to us, we are of the opinion that the sale of the said part of plant and machinery has not affected the going concern status of the company. 2. The inventory has been physically verified during the year by the management. In our opinion, the frequency of verification is reasonable. The procedures of physical verification of inventories followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business.  The company is maintaining proper records of inventory. The discrepancies noticed on verification between the physical stocks and the book records were not material. 3.  The company has granted loan to two companies covered in the register maintained under section 301 of the Companies Act, 1956. The maximum amount involved during the year was Rs.20 crores and the year-end balance of loans granted to such parties was Rs. 20 crores.  In our opinion, the rate of interest and other terms and conditions of such loans are not, prima facie, prejudicial to the interest of the company. The parties have repaid the principal amounts as stipulated and have also been regular in

The following paragraphs deal with the manner of qualification and the manner of disclosure, if any, to be made in the auditor’s report. AS-1 – DISCLOSURE OF ACCOUNTING POLICIES In the case of a company, members should quality their audit reports in case –  accounting policies required to be disclosed under Schedule VI or any other provisions of the Companies Act, 1956 have not been disclosed, or  accounts have not been prepared on accrual basis, or  the fundamental accounting assumption of going concern has not been followed and this fact has not been disclosed in the financial statements, or proper disclosures regarding changes in the accounting policies have not been made. Where a company has been given a specific exemption regarding any of the matters stated above but the fact of such exemption has not been adequately disclosed in the accounts, the member should mention the fact of exemption in his audit report without necessarily making it a subject matter of audit qualification. In view of the above, the auditor will have to consider different circumstances whether the audit report has to be qualified or only disclosures have to be given. In the case of enterprises not governed by the Companies Act, 1956, the member should examine the relevant statute and make suitable qualification in his audit report in case adequate disclosures regarding accounting policies have not been made as per the statutory requirements. Similarly, the member should examine if the fundamental accounting assumptions have been followed in preparing the financial statements or not. In appropriate cases, he should consider whether, keeping in view the requirements of the applicable laws, a qualification in his report is necessary. In the event of non-compliance by enterprises not governed by the Companies Act, 1956, in situations where the relevant statute does not require such disclosures to be made, the member should make adequate disclosure in his audit report without necessarily making it a subject matter of audit qualification. In making a qualification / disclosure in the audit report, the auditor should consider the materiality of the relevant item. Thus, the auditor need not make qualification / disclosure in respect of items which, in his judgement, are not material. A disclosure, which is not a subject matter of audit qualification, should be made in the auditor’s report in a manner that it is clear to the reader that the disclosure does not constitute an audit qualification. The paragraph containing the auditor’s opinion on true and fair view should not include a reference to the paragraph containing the aforesaid disclosure. Examples of Disclosures Where a partnership firm does not make adequate disclosures regarding the revaluation of its fixed assets. “During the year, the enterprise revalued its land and buildings. The revalued amounts of land and buildings are adequately disclosed in the balance sheet. However, the method adopted to compute the revalued amounts has not been disclosed, which is contrary to Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’ issued by the Institute of Chartered Accountants of India. We report that………”

Limitation on Scope: A limitation on the scope of the auditor’s work may sometimes be imposed by the entity, for example, when the terms of the engagement specify that the auditor will not carry out an audit procedure that the auditor believes is necessary. However, when the limitation in the terms of a proposed engagement is such that the auditor believes the need to express a disclaimer of opinion exists; the auditor should ordinarily not accept such a limited engagement as an audit engagement, unless required by statute. Also, a statutory auditor should not accept such an audit engagement when the limitation infringes on the auditor’s statutory duties. A scope limitation may be imposed by circumstances, for example, when the timing of the auditor’s appointment is such that the auditor is unable to observe the counting of physical inventories. It may also arise when, in the opinion of the auditor, the entity’s accounting records are inadequate or when the auditor is unable to carry out an audit procedure believed to be desirable. In these circumstances, the auditor would attempt to carry out reasonable alternative procedures to obtain sufficient appropriate audit evidence to support an unqualified opinion. When there is a limitation on the scope of the auditor’s work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed. Disagreement with Management: The auditor may disagree with management about matters such as the acceptability of accounting policies selected, the method of their application, or the adequacy of disclosures in the financial statements. If such disagreements are material to the financial statements, the auditor should express a qualified or an adverse opinion.

An auditor’s report is considered to be modified when it includes: 1. Matters That Do Not Affect the Auditor’s Opinion • emphasis of matter 2. Matters That Do Affect the Auditor’s Opinion • qualified opinion • disclaimer of opinion • adverse opinion Uniformity in the form and content of each type of modified report will enhance the user’s understanding of such reports. Accordingly, this AAS includes suggested wordings to express an unqualified opinion as well as examples of modifying phrases for use when issuing modified reports. Matters That Do Not Affect the Auditor’s Opinion: In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor’s opinion. The paragraph would preferably be included preceding the opinion paragraph and would ordinarily refer to the fact that the auditor’s opinion is not qualified in this respect. The auditor should modify the auditor’s report by adding a paragraph to highlight a material matter regarding a going concern problem where the going concern question is not resolved and adequate disclosures have been made in the financial statements. The auditor should consider modifying the auditor’s report by adding a paragraph if there is a significant uncertainty (other than going concern problem), the resolution of which isdependent upon future events and which may affect the financial statements. An uncertainty is a matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements. The addition of a paragraph emphasising a going concern problem or significant uncertainty is ordinarily adequate to meet the auditor’s reporting responsibilities regarding such matters. However, in extreme cases, such as situations involving multiple uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph. Matters that Do Affect the Auditor’s Opinion: An auditor may not be able to express an unqualified opinion when either of the following circumstances exists and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements:  there is a limitation on the scope of the auditor’s work; or there is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures. The circumstances described in 1. could lead to a qualified opinion or a disclaimer of opinion. The circumstances described in 2. could lead to a qualified opinion or an adverse opinion. A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management is not so material and pervasive as to require an adverse opinion, or limitation on scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being ‘subject to’ or ‘except for’ the effects of the matter to which the qualification relates. A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and is, accordingly, unable to express an opinion on the financial statements. An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the auditor’s report. In circumstances where it is not practicable to quantify the effect of modifications made in the audit report accurately, the auditor may do so on the basis of estimates made by the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates. Ordinarily, this information would be set out in a separate paragraph preceding the opinion or disclaimer of opinion and may include a reference to a more extensive discussion, if any, in a note to the financial statements.

An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. An unqualified opinion indicates, implicitly, that any changes in the accounting principles or in the method of their application, and the effects thereof, have been properly determined and disclosed in the financial statements. An unqualified opinion also indicates that:  the financial statements have been prepared using the generally accepted accounting principles, which have been consistently applied;  the financial statements comply with relevant statutory requirements and regulations; and  there is adequate disclosure of all material matters relevant to the proper presentation of the financial information, subject to statutory requirements, where applicable.