New Audit Reporting Standards

1. New Audit Reporting Standards CA. Saubhik Sarkar

2. Auditor’s Report • Shall be in writing • Written report encompasses reports issued: • in hard copy format AND • using electronic medium

3. Current Standards on Auditor’s Report

4. Form of Audit Opinions

5. Auditor’s Report – Auditor’s Objectives

6. Forming an Opinion on FS

7. Evaluations to Conclude on Reasonable Assurance If FS adequatelydisclose significant accntng policies Consistency & appropriateness of accntg policies with FRF Reasonableness ofaccntg estimates Relevance, reliability, comparability & understandability of info in FS Disclosures are adequate to enable users to understand effect of material transactionsor events on info in FS Terminologyused in FS isappropriate FS prepared in all material respects in accordance with FRF Qualitative aspects of accntg practices & possible bias in mgt judgment FS adequately describe or refer applicable FRF AUDITOPINION Conclusion onreasonableassurance Materiality of uncorrected misstatements individually or aggregate (SA 450) SAAE has been obtained(SA 330)

8. Fair Presentation FRF – If FS do not achieve fair presentation: • Discuss matter with mgt • Determine need to modify opinion depending upon • Requirements of FRF & • How matter is resolved Compliance FRF • No need to evaluate if FS achieve fair presentation • If in rare circumstances, auditor concludes FS are misleading, determine whether & how to communicate in audit report after: • Discuss with mgt • How matter is resolved

9. Law or Regulation Permits Departure from an FRF Requirement • Law/ Regulation/ Court Order may permit departure from the accepted Financial Reporting Framework • Deemed to be compliance with FRF (modified to that extent) • Does not require qualified audit opinion • If impact is material, describe the matter in Emphasis of Matter paragraph • Example: • RBI directive on treatment of gratuity liability in Banks– charge staggered over five years - departure from AS 15

10. Elements of Auditor’s Report

11. Title & Addressee • Title – “Independent Auditor’s Report” • Auditor’s assertion as to compliance with applicable ethical requirements • Addressee • Usually addressed to those for whom it is prepared

12. Management Responsibility • Preparation of financial statements that give true and fair view • Design, implementation and maintenance of internal controls • Specific agreement of management on its responsibilities needed • Through engagement letter (SA 210)

13. Auditor’s Responsibility • Expression of opinion on financial statements • Compliance with Standards on Auditing • Description of audit procedures • Audit evidence about amounts & disclosures in financial statements • Assessment of risk of material misstatements • Consideration of internal controls over financial reporting • Evaluation of • appropriateness of accounting policies • Reasonableness of management’s accounting estimates • Overall presentation of financial statements

14. Date of Auditor’s Report • Date informs the users that auditor has considered subsequent events upto that date • Makes auditor responsible for consideration of events/ transactions upto that date • Financial statements are management’s responsibility • Do not sign on a date before financial statements are approved by management (Board of Directors) • Can be signed on the same date

15. Wordings of auditor’s opinion prescribed by law/ regulation • Evaluate at engagement acceptance stage itself whether: • Users might misunderstand the assurance from audit; and if so • Providing additional explanation in auditor’s report can mitigate such understanding • If not, don’t accept such engagement • If law requires auditor to accept the engagement, do not include reference to SAs in auditor’s report

16. Financial Statements prepared in accordance with two FRFs • Consider each framework separately • If financial statements comply with each of the frameworks • May issue two separate opinions • If financial statements comply only with one of the frameworks • Issue unmodified opinion for the framework which is complied with • Issue modified opinion for the framework which is not complied with

17. Format Prescribed by Law/ Regulation Different from SA 700 • Wherever possible bring the same in line with requirements of SA 700 to the extent possible • Brings in consistency in reporting • Enhances credibility • Basic elements of auditor’s report as given in SA 700 must be present • Order of appearance/ layout would not matter • If auditor not free to bring in those elements • Cannot state that audit was carried out in accordance with SAs

18. Supplementary Information Presented with Financial Statements

19. Modified Opinion

20. Material Misstatement • Four aspects of FRF: • Recognition • Measurement • Classification and presentation • Disclosure • Misstatement - difference between how each of these aspects is reported in FS vis a vishow it should be reported as per applicable FRF • Appropriateness of selected accounting policies • Application of selected accounting policies • Appropriateness/ adequacy of disclosures • So, material misstatements not restricted only to recognition & measurement

21. Circumstances When Modification to Audit Opinion in Required Auditor concludes FS as a whole are not free of material misstatements Auditor obtains audit evidence OR Auditor unable to obtain SAAE Appropriateness of selected accntg policies Appropriateness or adequacy of disclosures in FS Limitations imposed by Mgt Circumstances beyond entity’s control Circumstances relating to nature & timing of auditor’s work Application of selected accntg policies

22. Types of Modified Opinions Qualified Adverse Disclaimer Affecting Factors Nature of matter giving rise to modification Auditor’s judgment re pervasiveness of effects/ possible effects of matter on FS AND Whether FS are materially misstated Inability to obtain SAAE leading to possible material misstatement in FS

23. Determining the Type of Modification to Auditor’s Opinion

24. What is PERVASIVE Describes effect on FS Possible effects on FS of misstatements Misstatements Undetected due to inability to obtain SAAE Auditor’s Judgment Not confined to specific elements, accounts or items of FS If confined, represents or could represent substantial portion of FS In relation to disclosures, are fundamental to user’s understanding of FS

25. Modified Opinion - Form & Content of Auditor’s Report Basis of Modification Para: • In addition to other elements as per SA 700(R) • Amend Auditor’s responsibility statement • Description of matter giving rise to modification • Placed immediately before Opinion Para • Use heading “Basis for ……….. Opinion”

26. Modified Opinions – Words of Caution • Use professional judgment • Within the framework of relevant accounting & auditing standards • In keeping with competencies expected from auditor’s training, knowledge & experience • Follow the processes laid out in SQC 1 & SA 220 • To be exercised through out the audit • To be documented appropriately • Professional judgment cannot support decisions not otherwise supported by facts & circumstances of engagements or sufficient appropriate audit evidence

27. Subsequent Scope Limitation Auditor accepts engagement Mgt imposes scope limitation Likely to result in qualification or disclaimer Determine possibility of performingalternative procedures to obtain SAAE Communicateto TCWG Mgt refuses Request Mgt to remove limitation Resign where practicable & not prohibited by law If auditor unable to obtain SAAE Disclaimer ? Communicate with TCWG If not possible to resign,disclaim the opinion Qualify ?

28. Adverse/ Disclaimer – Other Considerations • Audit report not to include unmodified opinion wrt same FRF on a single FS or one or more specific elements, accounts or items of FS • Otherwise audit opinion is contradicted on FS as a whole

29. Communication with TCWG If modified opinion is expected, communicate with TCWG: • Circumstances that led to expected modification • Proposed wording of modification

30. Some Illustrations

31. Departure from GAAPs - Qualified Opinion Basis of Qualified Opinion The Company’s inventories are carried at cost in the Balance Sheet at Rs. YYY. Management has not stated the inventories at the lower of cost and net realisable value but has stated them solely at cost, which constitutes a departure from Accounting Standards referred to in section 211(3C) of the Companies Act 1956. The Company’s records indicate that had the management stated the inventories at the lower of cost and NRV, an amount of Rs. BBB would have been required to write down the inventories to NRV. Accordingly the cost of sales would have been increased by Rs. BBB, and net profit, income tax and shareholders’ funds would have been reduced by Rs. BBB, Rs. CCC and Rs. DDD, respectively. Qualified Opinion In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in Basis for Qualified Opinion paragraph, the financial statements give a true and fair view……………………..

32. Departure from GAAPs - Adverse Opinion Basis for Adverse Opinion As explained in Note X, the Company has not consolidated the financial statements of a subsidiary company, ABC Ltd., it had acquired during 20XX because it has not yet been able to ascertain the fair values of certain of the subsidiary’s material assets and liabilities at the acquisition date. The acquisition is therefore accounted as an investment. Under the accounting principles generally accepted in India, the subsidiary should have been consolidated because it is controlled by the Company. Had ABC Ltd been consolidated, many elements in the accompanying financial statements would have been materially affected. The effects on the financial statements of the failure to consolidate have not been determined. Adverse opinion In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the consolidated financial statements do not give a true & fair view………….

33. Inability to obtain SAAE – Qualified Opinion Basis for Qualified Opinion ABC Ltd.’s investment in XYZ Co, a foreign associate acquired during the year and accounted for by the equity method is carried at Rs. XXX in the balance sheet as at 31st March 20XX and ABC’s share of income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of the Company’s investment in XYZ Co as at March 31, 20XX and the Companty’ share of XYZ Company’s net income for the year because we were denied access to financial information, management and auditors of XYZ Company. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.

34. Disclaimer of Opinion Basis for Disclaimer of Opinion The Company’s investment in its joint venture XYZ Co is carried at Rs. XXX in the Company’s balance sheet representing over 90% of the Company’s net assets as at 31st March 20XX. We were not allowed access to the management and the auditors of XYZ Company. As a result we were unable to determine whether any adjustments were necessary in respect of the Company’s proportional share of XYZ Company’s income & expenditure for the year, and the elements making up the Cash Flow Statement. Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.

35. Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

36. Emphasis of Matter (EoM) Para • Para included in Audit report • Matter appropriately presented/ disclosed in FS as required by applicable FRF • Matter in the auditor’s judgment is of importance • Matter is fundamental to users’ understanding of FS • EoM is not part of audit opinion • EoM does not imply audit opinion is modified in respect of that matter

37. Use of EoM – Words of Caution EoM not a substitute for Modified Opinion

38. EoM – Some More Considerations • Placement - immediately after Opinion para • Use heading “Emphasis of Matter” or other appropriate heading • EMP to contain clear reference to: • matter being emphasised • where relevant, disclosure that fully describe the matter can be found in FS • Indicate that audit opinion is not modified in respect of matter emphasised

39. Illustrative EoM – Recognition of Deferred Tax Emphasis of Matter Without qualifying our opinion, we draw attention to Note X to the financial statements, regarding recognition of deferred tax assets.

40. Other Matters Para (OMP) • Para included in AR • Refers to matter other than those presented/ disclosed in FS • In auditor’s judgment • Is relevant to users’ understanding of audit, auditor’s responsibilities or auditor’s report

41. OMP in Audit Report • Include if not prohibited by L&R • Use heading “Other Matter”/ other appropriate heading • Placement: • immediately after Opinion para & EoM or • elsewhere if OMP is relevant to Other Reporting Responsibilities section

42. OMP – Other Considerations • Clearly reflect that such other matter is not required to be presented and disclosed in FS. • Not to include • Info prohibited from inclusion by L&R, other standards, eg., Ethics relating to confidentiality of information. • Info required to be provided by mgt • Placement • Depends upon nature of info to be communicated

43. Communication with TCWG Communicate: • Expectation to include EMP/ OMP • Proposed wordings of paras

44. Reporting on Other Information in Documents Containing Audited FS – SA 720 Documents containing audited FS : • Annual reports (or similar documents) • Issued to owners (similar stakeholders) • Containing audited FS and Audit Report • SA 720 may be applied (adapted as necessary) to other documents containing audited FS.

45. What is “Other Information”

46. What is “Inconsistency” What is “Misstatement of Fact” • Other information that is: • Unrelated to audited FS and • Incorrectly stated/ presented • May undermine credibility of FS • Other information that contradicts information contained in audited FS • May raise doubt about: • audit conclusions drawn from audit evidence obtained earlier • Basis of audit opinion on FS

47. Audit Procedures Reading Other Information • to identify material inconsistencies vis a visaudited FS • Make appropriate arrangements with management/ TCWG to get “other information’ before date of Audit Report • Helps timely resolution of possible material inconsistency/ misstatement of facts • Agreement with management as to time of availability of “other information” • If not possible before, then get “other information”, as soon as practicable.

48. Material Inconsistency Identified Y Prior to Date of Audit Report ? N Audited FS needs revision? Audited FS needs revision? Other info needs revision Y N Y Mgt refuses ? Y Follow SA 560 Mgt refuses? Mgt refuses ? N Y Carry out necessary procedures Issue modified opinion Y • notify TCWG • take any other action, including seeking legal advice • communicate to TCWG AND • emphasis of matter para • OR • withdraw if legally permitted Can seek legal advice

49. Auditor BECOMES AWARE of Material Misstatement of Facts Discuss with Management • May not be possible to evaluate validity of: • Some disclosures in other info • Management’s responses Valid difference of opinion may exist Auditor considers APPARENT material misstatement of fact exists Auditor concludes material misstatement of fact exists request mgt to consult qualified 3rd party Consider advice received • Notify TCWG • Take further appropriate action

50. Audit Reports – What More the Users Want….. • What the auditor has done to ensure independence • Specific risks and focal points of attention in audit & reasons therefor • Audit steps to address those points • Materiality criteria used • Entities/ items specifically excluded from audit/ subjected to limited direct work • Steps taken to ensure high quality work if he uses work of other auditors