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Audit Report & Relevant Standard on Auditing

Audit Report & Relevant Standard on Auditing. C.A. Milan Mody Pune Branch of WIRC of ICAI jointly with WICASA Presented on 18 th December 2016. What are we covering today?. Reporting requirements under the Companies Act, 2013. Reporting requirement u/s 143. 143(1)

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Audit Report & Relevant Standard on Auditing

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  1. Audit Report &Relevant Standard on Auditing C.A. Milan Mody Pune Branch of WIRC of ICAI jointly with WICASA Presented on 18th December 2016

  2. What are we covering today?

  3. Reporting requirements under the Companies Act, 2013

  4. Reporting requirement u/s 143 143(1) Exceptional Reporting 143 (9) & 143 (10) Compliance with SA

  5. Exceptional reporting based on inquiry 143 (1)

  6. Reporting under section 143 (3) Auditor’s Report • Whether auditor has sought and obtained all information & explanation and if not, details with the effect of such information on the financial statements is required to be given • Whether proper books of account have been kept by the company / branch (as per Rule 3(5) of Companies (Accounts) Rules, 2014 backup should be maintained in India) • Whether branch audit report received and how it has been dealt with • Whether balance sheet and profit and loss account dealt with in the report are in agreement with books of account and returns Text marked in red is newly inserted in the Companies Act, 2013 as compared to the Companies Act, 1956.

  7. Reporting under section 143 (3) Auditor’s Report • Whether financial statements comply with the accounting standards • The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company • GN issued by ICAI • Whether directors is disqualified from being appointed as director u/s 164(2)

  8. Reporting under section 143 (3) Auditor’s Report • Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith • GN issued by ICAI • Whether company has adequate internal financial controls in place and operating effectiveness of such controls • As per GN separate report to be issued for IFC and reporting is only over financial reporting. • Implementation guide on audit of IFCOFR with specific reference to small, less complex companies

  9. Reporting under section 143 (3) Auditor’s Report • Others matters prescribed • Whether company has disclosed effect of pending litigation on financial position • Whether company has made provision for foreseeable losses on long term contract, including derivative contracts • Whether any delay in depositing money in IEPF

  10. Impact of qualification in Main report & IFC report

  11. Standards on Auditing … Guides the Auditor Report

  12. Reporting standards Standards on Auditing

  13. Key points on Reporting Standards

  14. Contents (headings) of an audit report Also refer next slide

  15. Contents (headings) of an audit report to change w.e.f 1st April 2017

  16. SA 705 Modification to the Opinion in the Independent Auditor’s Report SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

  17. Types of modified opinion

  18. Types of Modified Opinion FS having EOM / Modification are closely looked by stakeholders

  19. Guidance for modified opinion in audit report

  20. Impact of qualification in audit report • As per para A18 of SA 705, if financial statements are subject matter of qualification, the effect of the qualification on the financial Statements (unless impracticable) individually and also in aggregate. • Example : - If inventory is overstated- effects on inventory, PAT and reserves to be given

  21. Consistency in reporting • Opinion paragraph should give reference of modification para i.e. “except for the possible effects of the matter(s) ...” Similarly multiple reference to one comment in the report may be necessary e.g. AS compliance and books, Directors declaration and information and explanation received

  22. EOM and Other Matters [SA 706] Implementation Guide on Reporting Standards issued by ICAI includes 55 FAQ’s & 26 illustrative formats of audit report

  23. Impact of going concern assumption (SA 570) • Impact of Going Concern [SA 570] in Audit Report

  24. Consolidated audit report • The component auditor's observations, if any, on the component’s financial statements are required to be included in the parent auditor's report on the CFS, regardless of materiality” • Diminution in the value of investment in subsidiary is subject matter of qualification in standalone FS, the same would not be subject matter of qualification in audit report of CFS • In the case of components included in the consolidated financial statements of the parent company, reporting on the adequacy and operating effectiveness of internal financial controls would apply only if it is an Indian company under Companies Act, 2013

  25. Consolidated audit report • CARO 2016 is not applicable for Consolidated financial statements. • Reference is given to the audit evidence obtained by the other auditors and certification of management for the unaudited financial statements / information to form an opinion on the consolidated financial statements.

  26. ICAI announcement on Reporting on Components [CFS]

  27. SA 710 Comparative Information — Corresponding Figures and Comparative Financial Statements

  28. Qualification in last year and corresponding consequences in current year [Illustrative 1]

  29. Qualification in last year and corresponding consequences in current year [illustrative 2]

  30. SA 701 Communicating Key Audit Matters (KAM) in the Independent Auditors Report

  31. Key points – ‘KAM’ • Applicable to audit of listed entities • Effective for audits of financial statements for periods beginning on or after 01st April, 2017 • New dimension to audit report • Key matters are discussed with management and those charged with governance • Increase awareness to users

  32. Common Mistakes in Audit Report (compilation from FRRB)

  33. Common mistakes • Auditor’s Comment • Signature date prior to director’s signature Auditor has signed the Auditor’s report prior to the date when the financial statements were signed and authenticated by the director of the company. • Fellow member indicated Auditor has mentioned his membership number “F” (i.e. represent fellow member) is prefixed to Auditor’s Report. • Examined vs Audited Opening paragraphs of the Auditors Report states to have “examined the attached Balance Sheet…” • Requirements • SA – 700 (Para – 26) Since the Auditor’s responsibility is to report on the Financial Statements as prepared and presented by the management, the auditor should not date the report earlier than that the date on which the Financial Statements are signed or approved by management. • Institute does not give such prefix • Auditor should have used the word ‘audited’ rather than using the word ‘examined’ to reflect his correct responsibility.

  34. Common mistakes (contd..) • Auditor’s Comment • Cash flow statement not covered for reporting In the Auditor’s Reports no reference was made to the Cash Flow Statement in opening paragraph and opinion paragraph • Qualifications are not quantified • Requirements • SA 700 – (Para – 9) The auditor’s report should identify the cash flow statement as a part of financial statements and further, also express an opinion on the cash flow statement audited. • SA 700 – To give reasons for qualification, should also report the quantitative impact of such on the financial statements of each, individually as well as their aggregate. If impracticable – then state it.

  35. Common mistakes (Contd..) • Auditors’ comment • Silent about applicability of CARO • Auditor has not mentioned membership number / firm registration number in the audit report • Requirement • If CARO is not applicable it has to be explicitly stated in audit report. • As per para A36 of SA 700, it is mandatory for the auditor to mention the membership number and firm registration number as per ICAI.

  36. Other KEY Points

  37. Key points

  38. Practical Tips

  39. Good Practices • The conclusive opinion of the IFC can also be stated in the main audit report along with the reference of IFC Annexure as follows: “Our report expresses an unmodified opinion on the adequacy and operating effectiveness of the Company’s internal financial controls over financial reporting.” • Reference of EOM paragraph of last year given in the current period’s audit report: “Further the emphasis of matter mentioned in paras___ were also reported in our earlier audit report dated 30thJune 2011“

  40. Good Practices • Rotation of engagement partners to be done at periodic intervals before the stipulated time period of 7 years under SQC 1. • Giving cross references of relevant notes forming part of notes to financial statements in case of reporting requirement for the impact of pending litigation on its financial position. • It is preferred to give note reference for matters covered under EOM rather than reproducing the entire note in audit report.

  41. 41

  42. Thank you C.A. Milan Mody Milan.mody@nashah.com

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