CHAPTER
SA 700 (R)
FORMING AN OPINION ON THE FINANCIAL STATEMENTS
Q. What is the meaning of financial statement in revised SA 700?
Ans: Financial statement in this standard “a complete set of general purpose financial statements, including the related notes.” The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements. For example in case of a company companies act requires
# A Balance sheet
# A Profit and Loss account
# A Cash Flow Statement (if required)
# Notes to the accounts and significant accounting policies as referred in accounting standards under CASR (Company Accounting Standard Rules) 2006.
Q. What is auditor’s duty under this SA?
Ans: The auditor shall form an opinion on whether the financial statements are preared, in all material respects, in accordance with the applicable financial reporting framework. For this, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
That conclusion shall take into account:
(a) The auditor’s conclusion in accordance with SA 330, whether sufficient appropriate audit evidencehas been obtained;
(b) The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are material, individually or in aggregate; and
(c) In particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework:
(i) The financial statements adequately disclose the significant accounting policies selected and applied;
(ii) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate;
(iii) The accounting estimates made by the management are reasonable;
(iv) The information presented in the financial statements is relevant, reliable, comparable and understandeable.
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CHAPTER 35: Modifications to the Opinion in the Independent Auditor’s Report
Q. What do you mean by Modification to the opinion?
Ans: When the auditor is not giving Unmodified opinion it said he is modifying his opinion. According to SA 706(Revised) Modified opinion refers to a qualified opinion refers to a qualified opinion, an adverse opinion or a disclaimer of opinion.
Q. When Auditor will decide to modify his opinion?
Ans: According to SA 705(R) The auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
Q. What will be the consequence of a modified audit report?
Ans: This SA establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence may be materially misstated; and
(b) The auditor’s judgement about the pervasiveness of the effects or possible effects of the matter on the financial statements.
Q. When an auditor shall express a Qualified Opinion?
Ans: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
Q. When an auditor shall express an Adverse Opinion?
Ans: The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
Q. When an auditor shall express a Disclaimer of Opinion?
Ans: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
| 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 |
| Financial statements are materially misstated | Qualified opinion | Adverse opinion |
| Inability to obtain sufficient appropriate audit evidence | Qualified opinion | Disclaimer of opinion |
ILLUSTRATIVE FORMAT OF
AUDITORS REPORTS WITH MODIFICATION TO THE OPINION
Case-1: Inventories are misstated. The misstatement is deemed to be material but not pervasive to the financial statements. The audit opinion is qualified for the misstatement.
The Company’s inventories are carried in the Balance Sheet as Rs. Xxx. Management has not stated the inventories at the lower of cost and net realizable 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 realizable value, an amount of Rs. Xxx would have been required to write the inventories down to their net realizable 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.
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:
(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 20XX.
(b) in the case of Profit and Loss Account, of the profit/loss for the year ended on that date; and
(c) in the case of the Cash Flow statement, of the cash flows for the year ended on that date.
Case 2: The auditor was unable to obtain sufficient appropriate audit evidence regarding existence of investment in a foreign company. The possible effects of the inability to obtain sufficient appropriate audit evidence are deemed to be material but not pervasive to the financial statement. The audit opinion is qualified for the misstatement.
Basis for Qualified Opinion
ABC Company Limited’s investment in XYZ Company, a foreign company acquired during the year and accounted as Held to maturity investment in Balance sheet of ABC company Ltd. We were unable to obtain sufficient appropriate audit evidence about the existence of ABC Company Limited’s investment in XYZ Company as at March 31, 20XX because we were denied access to the financial information relating to the same, management , consequently, we were unable to determine whether any adjustments to these amounts were necessary.
Qualified Opinion:
In our opinion and to the best of our information and according to the explanations given to us, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:
(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 20XX.
(b) in the case of Profit and Loss Account, of the profit/loss for the year ended on that date; and
(c) in the case of the Cash Flow statement, of the cash flows for the year ended on that date.
Case 3: The auditor was unable to obtain sufficient appropriate audit evidence about multiple elements of the financial statements. That is, the auditor was unable to obtain audit evidence about the entity’s inventories and accounts receivable. The possible effects of this inability to obtain sufficient appropriate audit evidence are deemed to be both material and pervasive to the financial statements. A disclaimer of audit opinion is given in the circumstances.
Basis for Disclaimer of Opinion
We were appointed as auditors of the Company after March 31, 20XX and thus could not observe the counting of physical inventories at the beginning and end of the year. Accordingly, we were unable to satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0 and March 31, 20X1 which are stated in the Balance Sheet at Rs. Xxx and Rs. Xxx, respectively. In addition, the introduction of a new computerized accounts receivable system in September 20X1 resulted in numerous errors in accounts receivable. As of the date of our audit report, management was still in the process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or verify by alternative means accounts receivable included in the Balance sheet at a total amount of Rs. XXX as at March 31, 20X1. As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts receivable, and the elements making up the Statement of Profit and Loss and Cash Flow Statement.
Disclaimer of Opinion
Because of the significance of the matters 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.
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CHAPTER : SA 706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
Q. What do you mean by Emphasis of Matter paragraph in audit report?
Ans: According to SA 706 A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
(a) Include it immediately after the Opinion paragraph in the auditor’s report;
(b) Use the heading “Emphasis of Matter”’ or other appropriate heading;
(c) Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements; and
(d) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
For example: If there is uncertainty relating to a pending exceptional litigation matter. This is highlighted in the auditor’s report by an Emphasis of Matter paragraph.
After opinion paragraph following shall be added. “We draw attention to Note X to the financial statements which describes the uncertainty related to the outcome of the lawsuit filed against the Company by XYZ company. Our opinion is not qualified in respect of this matter.”
Q. What do you mean by other matter paragraphs in the independent auditors report?
Ans: A paragraph included in the auditor’s report that refers to a matter
other than those presented or disclosed in the financial statements that,
in the auditor’s judgment, is relevant to user’s understanding of the
audit, the auditor’s responsibilities or the auditor’s report.
If the auditor considers it necessary to do so he should include a
paragraph in the auditor’s report, with the heading “Other Matter”,
other appropriate heading. The auditor shall include this paragraph
immediately after the Opinion paragraph and any Emphasis of Matter
paragraph, or elsewhere in the auditor’s report if the content of the Other
Matter paragraph is relevant to the Other Reporting Responsibilities
section.
For example: In case of auditor of CFS The report includes an Other Matter paragraph in respect of the auditor’s responsibility in respect of subsidiaries not audited by him but which form part of the consolidated financial statements under report.
Other Matter
“We did not audit the financial statements of certain subsidiaries, whose financial statement 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.”
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CHAPTER 37: SA 710 (R)
Comparative Information – Corresponding Figures and Comparative Financial Statements
Q. What do you mean by Comparative Information and its types?
Ans: According to SA 710 Comparative information means the amounts
and disclosures included in the financial statements in respect of one or
more prior periods in accordance with the applicable financial reporting
framework. Mainly these can be presented in either of the following way.
By way of Corresponding figures – Comparative information where
amounts and other disclosures for the prior period are included as an
integral part of the current period financial statements, and are intended
to be read only in relation to the amounts and other disclosures relating to the current period (referred to as “current period figures”). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures.
By way of Comparative financial statements – Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s opinion. The level of information included in those comparative financial statements is comparable with that of the financial statements of the current period.
Q. What is objective of the auditor under this SA?
Ans: According to SA 710 The objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence about whether the comparative information included in the financial statements has been presented, in all material respects, in accordance with the requirements for comparative information in the applicable financial reporting framework; and
(b) To report in accordance with the auditor’s reporting responsibilities.
Q. What are the requirements of Audit Reporting under this SA?
Ans: In relation to Corresponding Figures following may be the different situation:-
Situation – 1 Current years report is unqualified and previous auditors report was also unqualified:- When corresponding figures are presented, the auditor’s opinion usually shall not refer to the corresponding figures. Unqualified opinion as such implies auditors satisfaction related to corresponding figures.
Situation – 2: If the auditor’s report on the prior period, as previously issued, included a qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modification is resolved:- the auditor shall modify the auditor’s opinion on the current period’s financial statements.
Situation – 3: If the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements on which an unmodified opinion has been previously issued:- the auditor shall verify whether the misstatement has been dealt with as required under the applicable financial reporting framework and, if that is not the case, the auditor shall express a qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified with respect to the corresponding figures included therein.
Situation – 4: If the prior financial statements were not audited:- the auditor shall state in an Other Matter paragraph in the auditor’s report that the corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of the requirement to obtain sufficient appropriate audit evidence that the opening balances do not contain misstatements that materially affect the current period’s financial statements.
As in Indian FRF no corresponding FS are there we are not discussing the same.
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CHAPTER 38 SA 720
The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements
Q. What do you mean by other Information?
Ans: According to SA 720 other information refers to Financial and non-financial information (other than the financial statements and the auditor’s report thereon) which is included, either by law, regulation or custom, in a document containing audited financial Statements and the auditor’s report thereon.
Q. What is objective of Auditor in this SA?
Ans: The objective of the auditor is to respond appropriately when documents containing audited financial statements and the auditor’s report thereon include other information that could undermine the credibility of those financial statements and the auditor’s report.
Q. What are steps involved in responding to other information?
Ans: The auditor shall read the other information to identify material inconsistencies, if any, with the audited financial statements. The auditor shall make appropriate arrangements with management or those charged with governance to obtain the other information prior to the date of the auditor’s report. If it is not possible to obtain all the other information prior to the date of the auditor’s report, the auditor shall read such information as soon as practicable. If, on reading the other information, the auditor identifies a material inconsistency, the auditor shall determine whether the audited financial statements or the other information needs to be revised.
Material Inconsistencies Identified in Other Information Obtained Prior to the Date of the Auditor’s Report
When revision of the audited financial statements is necessary and management refuses to make the revision, the auditor shall modify the opinion accordance with SA 705.
When revision of the other information is necessary and management refuses to make the revision; the auditor shall communicate this matter to those charged with governance; and
(a) Include in the auditor’s report an Other Matter(s) paragraph describing the material inconsistency in accordance with SA 706; or
(b) Where withdrawals is legally permitted, withdraw from the engagement.
Material Inconsistencies Identified in Other Information Obtained Subsequent to the Date of the Auditor’s Report
When revision of the audited financial statements is necessary, the auditor shall follow the relevant requirements in SA 560 (Revised).
When revision of the other information is necessary and management agrees to make the revision, the auditor shall carry out the procedures necessary under the circumstances. When revision of the other information is necessary but the management refuses to make the revision, the auditor shall notify those charged with governance of the auditor’s concern regarding the other information and take any further appropriate action.
Material Misstatements of Fact
If, one reading the other information for the purpose of identifying material inconsistencies, the auditor becomes aware of an apparent material misstatement of fact, the auditor shall discuss the matter with management. When, following such discussions, the auditor still considers that there is an apparent material misstatement of fact, the auditors shall request management to consult with a qualified third party, such as the entity’s legal counsel, and the auditor shall consider the advice received. When the auditor concludes that there is a material misstatement of fact in the other information which management refuses to correct, the auditor shall notify those charged with Governance of the auditor’s concern regarding the other information and take any further appropriate action.
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CHAPTER SA 800
Special Considerations.
Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
Q. What is Special Purpose Framework for preparation and presentation of financial statements?
Ans: According to SA-800 A financial reporting framework designed to meet the financial information needs to specific users. The financial reporting framework may be a fair presentation framework or a compliance Framework. For example if an entity is presenting the cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors; or another example may be? The financial reporting provisions established by a regulator to meet the requirements of that regulator; suppose for the purpose of sanctioning a grant.
Q. What consideration are required to conduct audit of such special purpose financial statements?
Ans: In an audit of special purpose financial statements, the auditor shall obtain an understanding of:
(a) The purpose for which the financial statements are prepared;
(b) The intended users; and
(c) The steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.
SA 700 (Revised) deals with the form and contents of the auditor’s report. In the case of an auditor’s report on special purpose financial statements:
(a) The auditor’s report shall also describe the purpose for which the financial statements are pre[ared and, if necessary, the intended users, or refer to a note in the special purpose financial statements that contains that information; and
(b) If management has a choice of financial reporting frameworks in the preparation of such financial statements, the explanation of management’s responsibility for the financial statements shall also make reference to its responsibility for determining that the applicable reporting framework is acceptable in the circumstances.
Special Note:- The auditor’s report on special purpose financial statements shall include an Emphasis of Matter paragraph alerting users of the auditor’s report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose. The auditor shall include this paragraph under an appropriate heading. For example
“Without modifying our opinion , we draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist ABC Company Ltd. To comply with the financial reporting provisions of the contract referred to above. As a result, the financial statements may not be suitable for another purpose. Our report is intended solely for ABC Company Ltd. And DEF Company Ltd. And should not be distributed to or used by parties other than ABC Company Ltd. Or DEF Company Ltd.”
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CHAPTER SA 805
SPECIAL CONSIDERATIONS
Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
Q. What do you mean by single financial statements, specific elements, accounts or item of a Financial Statement?
Ans: Single financial statement means a part of complete set of financial statement (for example, a cash flow statement) and special elements (for example, cash and bank balances). Sometimes management requires an audit of the same for example The financial statement has been prepared by management of the entity in accordance with the cash receipts and disbursements basis of accounting to respond to a request for cash flow information received from a creditor. Now auditor is required to audit the same. This kind of requirement of audit may found in special items like audit of Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for “incurred but not reported” claims in an insurance portfolio, including related notes.
Q. What considerations are required to conduct such an audit?
Ans: Uditor shall follow all SAs applicable to circumstances and should report accordingly. How to and express opinion and how to emphasize the matter is illustrated below.
Opinion
In our opinion, the financial statement presents a true and fair view of the cash receipts and disbursements of ABC Company Ltd. For the year ended March 31, 20X1 in accordance with the cash receipts and disbursements basis of accounting described in Note X.
Basis of Accounting
Without modifying our opinion, we draw attention to Note X to the financial statement, which describes the basis of accounting. The financial statement is prepared to provide information to XYZ Creditor. As a result, the statement may not be suitable for another purpose.
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CHAPTER
SA 810
ENGAGEMENT TO REPORT ON SUMMARY FINANCIAL STATEMENTS
Q. What is summary financial statements?
Ans: According to SA 806 Historical financial information that is derived from financial statements but that contains less detail than the financial statements, while still providing a structural representation consistent with that provided by the financial statements of the entity’s economic resources or obligations at a point in time or the changes therein for a period of time 3. Different jurisdictions may use different terminology to describe such historical financial information.
Q. Before accepting such an assignment what is auditors duty?
Ans: The auditor shall, ordinarily, accept an engagement to report on summary financial statements in accordance with this SA only when the auditor has been engaged to conduct an audit in accordance with SAs of the financial statements from which the summary financial statements are derived. Before accepting an engagement to report on summary financial statements, the auditor shall:
(a) Determine whether the applied criteria are acceptable;
(b) Obtain the agreement of management that it acknowledges
and understands its responsibility:
i. For the preparation of the summary financial statements in accordance with the applied criteria;
ii. To make the audited financial statements available to the intended users of the summary financial statements without undue difficulty and
iii. To include the auditor’s report on the summary financial statements in any document that contains the summary financial statements and that indicates that the auditor has reported on them.
Q. What shall be the procedure for the audit of above?
Ans: The auditor shall perform the following procedures, and any other procedures that the auditor may consider necessary, as the basis for the auditor’s opinion on the summary financial statements:
(a) Evaluate whether the summary financial statements adequately disclose their summarized nature and identify the audited financial statements.
(b) When summary financial statements are not accompanied by the audited financial statements, evaluate whether they describe clearly:
(i) From whom or where the audited financial statements are available; or
(ii) The law or regulation that specifies that the audited financial statements need not be made available to the intended of the summary financial statements and establishes the criteria for the preparation of the summary financial statements.
(c) Evaluate whether the summary financial statements adequately disclose the applied criteria.
(d) Compare the summary financial statements with the related information in the audited financial statements to determine whether the summary financial statements agree with or can be re-calculated from the related information in the audited financial statements.
(e) Evaluate whether the summary financial statements are prepared in accordance with the applied criteria.
(f) Evaluate, in view of the purpose of the summary financial statements, whether the summary financial statements contain the information necessary, and are at an appropriate level of aggregation, so as to be misleading in the circumstances.
(g) Evaluate whether the audited financial statements are available to the intended users of the summary financial statements without undue difficulty, unless law or regulation provides that they need not be made available and establishes the criteria for the preparation of the summary financial statements.
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