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AUDIT REPORTS

By:CA. Pankaj Garg



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Elements of Auditor¶s Report

Title

Addressee

Opening or Introductory Paragraph Scope Paragraph

Opinion Paragraph

Date of the Report Place of signature

Auditor¶s signature.



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Opening or Introductory Paragraph

It covers the followings aspects:

Identification of financial statements that

have been audited; Date and period covered by the financial

statements;

Management responsibility for preparation of financial statements;

Auditor¶s responsibility for expression of

opinion.



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Opening paragraph - Illustration

³We have audited the attached Balance

Sheet of M/s______ as at 31st March ____

and also the Profit and Loss account for theyear ended on that date annexed thereto.

These financial statements are the

responsibility of the entity¶s management.

Our responsibility is to express an opinion

on these financial statements based on out

audit´.



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Scope Paragraph

It covers the followings:

Describing the scope of audit by standing that

audit was conducted in accordance with AAS. Requirement of AAS that auditor should

obtain reasonable assurance that the financial

statements are free of material misstatement.

Auditors believing that their audit provides a

reasonable basis for their opinion.



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Scope Paragraph - Illustration

³We conducted out audit in accordance with the AAS

generally accepted in India. Those standards require that

we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are freeof 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 andsignificant 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´.



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Opinion Paragraph

It covers the followings aspects:

Auditor¶s opinion about true and fair

view of financial statements. Reporting on various matters required

by law.



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Opinion Paragraph ± Illustration

In our opinion and to the best of our information

and according to the explanations given to us,

the financial statement gives a true and fair

view in conformity with the accounting principles generally accepted in India.

In the case of Balance Sheet, of the state of

affairs of the M/s____ as at 31st

March _____. In the case of Profit and Loss Account of the

profit/loss for the year ended on that date.



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Types of Audit Reports

Types of Reports

Unqualified Modified Disclaimer of Opinion

Do not affect Opinion Affect Opinion

Qualified Adverse



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Unqualified Reports

An opinion is said to be unqualified

when the auditor concludes that the

financial statements give a true andfair view in accordance with the

financial reporting framework used for

the preparation and presentation of thefinancial statements.



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Unqualified Report

An Unqualified Report indicates the followings:

Financial Statements have been prepared using

the generally accepted accounting principles.

Financial Statements comply with relevant

statutory requirements and regulations.

All material matters have been adequately

disclosed.

Effect of any change in the accounting policies

have been properly determined and disclosed in

the financial statements.



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Modified Reports

An Report other than unqualified is said to be

MODIFIED. As per AAS ± 28, an auditor¶s

report is considered to be modified when it

includes:

(a) Matters that do not affect the auditor¶s

opinion ± with emphasis of matter

(b)Matters that do affect the auditor¶s opinion

± Qualified Reports and adverse Reports



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Qualified Audit Reports

A qualified audit report is one where an auditor gives

an opinion on the truth and fairness of financial

statements, subject to certain reservations.

A qualified opinion should be expressed when theauditor concludes that ±

(a) An unqualified opinion cannot be expressed; or

(b) The effect of any disagreement with management

is not so material as to require an adverse

opinion;

(c) The limitation on scope is not so material as to

require a disclaimer of opinion.



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Circumstances which demand qualified report

Auditor is unable to obtain necessary information &explanations.

Proper books of account have not been kept by the

company. Balance Sheet and Profit and Loss Account are not in

agreement with the books of account and returns.

Profit and Loss account & the balance sheet do not

comply with the Accounting Standards. If there is contravention of the provisions of

Companies Act having a bearing on the accounts andtransactions of the company.



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Disclaimer of Opinion

The auditor while performing his work may

come across several instances where he fails to

obtain sufficient information to warrant an

expression of opinion, and thus, is unable to

form an opinion, he issues a disclaimer of

opinion. Accordingly, the auditor may state that

he is unable to express an opinion because hehas not been able to obtain sufficient and

appropriate audit evidence to form an opinion´.



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Applicability of CARO 2004

CARO, 2004 is applicable to all types of companies

including a foreign company, but shall not apply to:

1. A banking company;

2. An insurance company;

3. Sec. 25 Company; and

4. A private limited company:

- paid up capital & reserves does not exceeds Rs. 50 lakh;

- outstanding loan does not exceeds Rs. 25 Lakhs,

- turnover does not exceed Rs. 5 crore.



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CARO 2004 ± Fixed Assets

whether the company is maintaining proper records

showing full particulars, including quantitative

details and situation of fixed assets;

whether these fixed assets have been physicallyverified by the management at reasonable intervals;

whether any material discrepancies were noticed on

such verification and if so, whether the same have

been properly dealt with in the books of account; and

if a substantial part of fixed assets have been

disposed off during the year, whether it has affected

the going concern.



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CARO 2004 ± Inventories

whether physical verification of inventory has been

conducted at reasonable intervals by the management;

are the procedures of physical verification of inventory

followed by the management reasonable and adequate inrelation to the size of the company and the nature of its

business. If not, the inadequacies in such procedures

should be reported; and

whether the company is maintaining proper records of inventory and whether any material discrepancies were

noticed on physical verification and if so, whether the

same have been properly dealt with in the books of

account.



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CARO 2004 ± Loan and Advances

has the company granted any loans, secured or unsecured to companies, firms or other partiescovered in the register maintained u/s 301 of the Act.If so, give the number of parties & amount involved

in the transactions; whether the rate of interest & other terms of loans

given by the company, are prima facie prejudicial tothe interest of the company;

whether receipt of the principal amount & interestare regular;

if overdue amount is more than Rs. 1,00,000,whether reasonable steps have been taken by thecompany for recovery of the principal & interest;



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CARO 2004 ± Loan and Advances

has the company taken any loans, secured or

unsecured from companies, firms or other parties

covered in the register maintained u/s 301 of the Act.

If so, give the number of parties & amount involvedin the transactions;

whether the rate of interest and other terms of loans

taken by the company, are prima facie prejudicial to

the interest of the company; and

whether payment of the principal amount & interest

are also regular.´



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CARO 2004 ± Internal Control

Is there an adequate internal control system

commensurate with the size of the

company and the nature of its business, forthe purchase of inventory and fixed

assets and for the sale of goods and

services?W

hether there is a continuingfailure to correct major weaknesses in

internal control system.



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CARO 2004 ± Contracts in Which Directors Interested

whether the particulars of contracts or

arrangements referred to in section 301 of the

Act have been entered in the register required

to be maintained under that section; and

whether transactions made in pursuance of

such contracts or arrangements have been

made at prices which are reasonable havingregard to the prevailing market prices at the

relevant time;´



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CARO 2004 ± Internal Audit

In the case of listed companies and/or other companies having a paid up capital andreserves exceeding Rs. 50 lakhs as at the

commencement of the financial year concerned, or having an average annualturnover exceeding five crore rupees for a period of three consecutive financial years

immediately preceding the financial year concerned, whether the company has aninternal audit system commensurate with itssize and nature of its business.



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CARO 2004 ± Cost Records

Where maintenance of cost records has

been prescribed by the Central

Government under clause (d) of sub-section (1) of section 209 of the Act,

whether such accounts and records have

been made and maintained.



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CARO 2004 ± Statutory Dues

is the company regular in depositing undisputed

statutory dues including PF, Investor Education and

Protection Fund, ESI, Income-tax, Sales-tax, Wealth tax,

Service tax, Custom Duty, Excise Duty, cess and anyother statutory dues with the appropriate authorities and

if not, the extent of the arrears of outstanding statutory

dues as at the last day of the financial year concerned for

a period of more than 6 months from the date they

became payable.

in case taxes have not been deposited on account of any

dispute, then the amounts involved and the forum where

dispute is pending shall be mentioned.



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CARO 2004 ± Others

whether the company has given any guaranteefor loans taken by others from bank or financial institutions, the terms and conditions

whereof are prejudicial to the interest of thecompany;

whether term loans were applied for the purpose for which the loans were obtained;

whether the funds raised on short-term basishave been used for long term investment; If yes, the nature and amount is to be indicated;



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CARO 2004 ± Others

whether security or charge has been created in

respect of debentures issued?

whether the management has disclosed on the

end use of money raised by public issues and

the same has been verified;

whether any fraud on or by the company has

been noticed or reported during the year; if yes, the nature and the amount involved is to

be indicated.



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Nov. 02 (4 + 4 Marks)

Q. No. 1: State your views on thefollowing: The Auditor does not agreewith affirmations made in the

financial statements.

Q. No. 2: State your views on the

following: The auditor fails to obtainsufficient information to form anoverall opinion on the matterscontained in the financial statements.



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May & Nov. 03 (3 Marks)

Q. No. 3: Comment: No cost accountingrecords are maintained though thecompany is required to maintain the

same.

Q. No. 4: Comment on the following: ABC

Ltd. has not deposited provident fundcontributions of Rs.20 lakhs to theauthorities, but accounted in the books.



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Nov. 05 (4 Marks)]

Q. No. 5: As an auditor, comment on the following: SK Ltd. has fully computerised its accountingoperations. The stock records are maintained up todate with timely entries passed for all receipts and

issues. The company has hired a professionalsecurity agency, which monitors and implements aclose vigilance over the operations of thecompany. As such, the company had dispensed

with the practice of taking stock of their inventories at the year end as in their opinion theexercise is redundant, time consuming andintrusion to normal functioning of the operations.



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May 06 (5 Marks)

Q. No. 6: As an auditor, comment on thefollowing situations/statements: XLtd., to whom Companies (Auditor¶s

Report) Order, 2003 is applicable, hasissued 9% Debenture of Rs. 5 crores,redeemable after 5 years and used the proceeds of issue for payment of

Sundry Creditors and other CurrentLiabilities of Rs. 2.80 crores.



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Nov. 06 (4 Marks)

Q. No. 7: As an Auditor, comment on the following

situations/statements: JKT Ltd. having Rs. 40

lacs paid up capital, Rs. 9.50 lacs reserves and

turnover of last three consecutive financialyears, immediately preceding the financial year

under audit, being Rs. 4.90 crores, Rs. 4.50

crores and Rs. 6 crores, but does not have any

internal audit system. In view of themanagement, internal audit system is not

mandatory.

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