AUDIT REPORTAudit Report 11

Audit Report
An audit report should be clear, specific and complete, in order that anyone who has an occasion to
read it may know exactly what is wrong with the company.
The auditor should review and assess the conclusions drawn from the audit evidence obtained as the
basis for the expression of an opinion on the financial statements. This review and assessment
involves considering whether the financial statements have been prepared in accordance with an
acceptable financial reporting framework applicable to the entity under audit. It is also necessary to
consider whether the financial statements comply with the relevant statutory requirements.
The auditor’s report should contain a clear written expression of opinion on the financial statements
taken as a whole.

Basic Elements of the Auditor’s Report: As per SA 700 “Forming an opinion and reporting on
financial statements” the auditor’s report includes the following elements in the following layout:
1. Title: The auditor’s report shall have a title that clearly indicates that it is the report of
independent auditor.
2. Addressee: The auditor’s report shall be addressed as required by the circumstances of the
engagement.
3. Introductory Paragraph: The introductory paragraph in the auditor’s report shall:
(a) Identify the entity whose financial statements have been audited:
(b) Specify the date or period covered by each financial statement comprising the financial
statements.
4. Management’s Responsibility for the Financial Statements:
(a) This section of the auditor’s report describes the responsibilities of those in the
organization that are responsible for the preparation of the financial statements.
(b) The auditor’s report shall describe management’s responsibility for the preparation of the
financial statements in the manner which that responsibility is described in the terms of the
audit engagement. The description shall include an explanation that management is
responsible for the preparation of the financial statements in accordance with the
applicable financial reporting framework; this responsibility includes the design,
implementation and maintenance of internal control relevant to the preparation of
financial statements that are free from material misstatement. Whether due to fraud or
error.
5. Auditor’s Responsibility: The auditor’s report shall include a section with the heading “Auditor’s
Responsibility”
The auditor’s report shall state that the responsibility of the auditor is to express an opinion on
the financial statements based on the audit.
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AUDIT REPORT 11.2
The auditor’s report shall state that the audit was conducted in accordance with Standards on
Auditing issued by the Institute of Chartered Accountants of India. The auditor’s report shall also
explain that those Standards require that the auditor comply with ethical requirements and that
the auditor plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
The auditor’s report shall describe an audit by stating that:
(a) An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements;
(b) The procedures selected depend on the auditor’s judgment including the assessment of the
risks of material misstatement of the financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation of the financial statements in order to design audit procedures that are
appropriate in the circumstance, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. In circumstances when the auditor also has a
responsibility to express an opinion on the effectiveness of internal control in conjunction
with the audit of the financial statements, the auditor shall omit the phrase that the
auditor’s consideration of internal control is not for the purpose of expressing an opinion on
the effectiveness of internal control; and
(c) An audit also includes evaluating the appropriateness of the accounting policies used and
the reasonableness of accounting estimates made by management, as well as the overall
presentation of the financial statements.
6. Auditor’s Opinion: The auditor’s report shall include a section with the heading “Opinion”.
When expressing an unmodified opinion on financial statements prepared in accordance with a
fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or
regulation, use one of the following phrases, which are regarded as being equivalent:
(a) The financial statements present fairly, in all material respects, in accordance with [the
applicable financial reporting framework]: or
(b) The financial statements give a true and fair view of in accordance with [the applicable
financial reporting framework]
7. Other Reporting Responsibilities: If the auditor addresses other reporting responsibilities in the
auditor’s report on the financial statements that are in addition to the auditor’s responsibility
under the SAs to report on the financial statements. These other reporting responsibilities shall
be addressed in a separate section in the auditor’s report that shall be sub-titled “Report on
Other Legal and Regulatory Requirements, “ or otherwise as appropriate to the content of the
section.
8. Signature of the Auditor: The auditor’s report shall be signed.
9. Date of the Auditor’s Report: The auditor’s report shall not be dated earlier than the date on
which the auditor has obtained sufficient appropriate audit evidence on which to base the
auditor’s opinion on the financial statements.

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AUDIT REPORT 11.3
10. Place of Signature: The auditor’s report shall name specific location, which is ordinarily the city
where the audit report is signed.

A measure of uniformity in the form and content of the auditor’s report is desirable because it helps
to promote the reader’s understanding of the auditor’s report and to identify unusual circumstances
when they occur. A statute governing the entity or a regulator may require the auditor to include
certain matters in the audit report or prescribe the form in which the auditor should issue his report.
In such a case, the auditor should incorporate in his audit report, the matters specified by the
statute or regulator and/or report in the form prescribed by them.

Format of Audit Report

The following is an illustration of a complete auditor’s report incorporating the basic elements set
forth and illustrated above. This report illustrates the expression of an unqualified opinion.

INDEPENDENT AUDITOR’S REPORT

To,
The Members of ……………………….

Report on the Financial Statements

We have audited the accompanying financial statements of ABC Company Limited (“the Company”)
which comprise the Balance Sheet as at March 31st 20XX and the Statement of profit and loss and
Cash Flow Statement for the year then ended, and summary of significant accounting policies and
other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements that give a true and fair
view of the financial position, financial performance and cash flows of the company in accordance
with the Accounting Standards. This responsibility includes the design, implementation and
maintenance of internal control relevant to the preparation and presentation of the financial
statements that give a true and fair view and are free from material misstatement, whether due to
fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with the Standards on Auditing issued by the Institute of
Chartered Accountants of India. Those Standards required that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement.

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AUDIT REPORT 11.4
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risk of material misstatement of the financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the Company’s preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of the accounting estimates
made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.

Opinion
In our opinion and to the best of our information and according to the explanations given to us, 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 the 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.

Report on Other Legal and Regulatory Requirements

1. As required by the Companies (Auditor’s Report) Order, 2003 (“the Order”) issued by the Central
Government of India in terms of Sec. 143(11) of the Companies Act, 2013, we give in the
Annexure a statement on the matters specified in CARO.
2. As required by section 143(3) of the Act, we report that:
(a) Whether he has sought and obtained all the information and explanations which to the
best of his knowledge and belief were necessary for the purpose of his audit and if not, the
details thereof and the effect of such information on the financial statements;
(b) Whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns
adequate for the purposes of his audit have been received from branches not visited by
him;
(c) Whether the report on the accounts of nay branch office of the company audited by the
branch auditor has been sent to him and the manner in which he has with it in preparing his
report;
(d) Whether the company’s balance sheet and profit and loss account dealt with in the report
are in agreement with the books of account and returns;
(e) Whether, in his opinion, the financial statements comply with the Accounting Standards;

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AUDIT REPORT 11.5
(f) The observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company;
(g) Whether any director is disqualified from being appointed as a director under sub-section
(2) of section 164;
(h) Any qualification, reservation or adverse remark relating to the maintenance of accounts
and other matters connected therewith;
(i) Whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
(j) Following matters which have been prescribed under the Rules:
(a) Whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statements;
(b) Whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(c) Whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company.

For ABC and Co.,

Chartered Accountants
Firm Registration No.

Auditor’s Signature
(Name of Member signing the Audit Report)
(Designation)
(Membership Number)

Place of Signature:
Date:

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AUDIT REPORT 11.6
Types of Audit Report
Audit Report

Clean / Unqualified Report Modified Report

Matters that do not effect Matters that do effect

Auditors opinion Auditors opinion

Emphasis of Other Qualified Adverse Disclaimer

Matter Matter Report Report Report

Unqualified Report: 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:
(a) The financial statements have been prepared using the generally accepted accounting principles,
which have been consistently applied:
(b) The financial statements comply with relevant statutory requirements and regulation: and
(c) There is adequate disclosure of all material matters relevant to the proper presentation of the
financial information, subject to statutory requirements where applicable.

Emphasis of Matter paragraph: Sometimes the auditor considers it necessary to draw user’s
attention to a matter presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to user’s understanding of the financial
statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report
provided the auditor has obtained sufficient appropriate audit evidence that the matter is not
materially misstated in the financial statements.
The Examples of circumstances where the auditor may consider it necessary to include an Emphasis
of Matter paragraph are:
• An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
• Early application (where permitted) of a new accounting standard that has a pervasive effect on
the financial statements in advance of its effective date.
• A major catastrophe that has had, or continues to have, a significant on the entity’s financial
position.
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AUDIT REPORT 11.7
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor
shall:
(i) Include it immediately after the Opinion paragraph in the auditor’s report;
(ii) Use the heading “Emphasis of Matter”, or other appropriate heading;
(iii) 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
(iv) Indicate that the auditor’s opinion is not modified in respect of the matter emphasised.

Other Matter Paragraphs in the Auditor’s Report: If the auditor considers it necessary to
communicate a matter other than those that are presented or disclosed in the financial statements
that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report and this is not prohibited by law or regulation, the auditor
shall do so in a paragraph in the auditor’s report, with the heading “Other Matter” or other
appropriate heading. The auditor shall include this paragraph immediately after the Opinion
paragraph.

Qualified Opinion: The auditor shall express a qualified opinion when:

(i) The auditor having obtained sufficient appropriate audit evidence which are material, but not
pervasive, to the financial statements, or
(ii) 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.

Disclaimer of Opinion: 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
he possible effects on the financial statements of undetected misstatements, if any, could be both
material and pervasive.

Adverse Opinion: 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. 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 effects (Individually
and in aggregate on the financial Statements) should be mentioned in the auditor’s report.
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.

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AUDIT REPORT 11.8
The table below illustrates how these auditor’s judgment about the nature of the matter giving rise
to the modification, affects the type of opinion to be expressed.

Nature of Mater Giving Rise to Auditor’s Judgment about the Pervasiveness of the Effects or
the Modification Possible Effects on the Financial Statements
Material but Not Pervasive Material and Pervasive
Financial statements are Qualified opinion Adverse opinion
materially misstated
(disagreement with
management)
Inability to obtain sufficient Qualified opinion Disclaimer of opinion
appropriate audit evidence
(Limitation on Scope of
Auditor’s work)

Examples:
(A) Explanatory Paragraph Because of Going Concern Doubt
Auditor’s Report
(Same introductory, Scope paragraph as of standard unqualified report)
Without qualifying our opinion, we draw attention to Note ….. of the financial statements. The
company has incurred a substantial operating loss of ` 1,00,00,000 and there is significant
reduction in working capital of ` 6,00,000. These factors raise significant doubt about its
capacity to continue as a going concern.

(B) Explanatory Paragraph Because of Significant Uncertainty

Auditor’s Report
(Same introductory and scope paragraph as of a standard unqualified report)
Without qualifying our report, we draw attention to Note 3 of Schedule 1 to the financial
statements. PQR Ltd., a subsidiary of the company, is currently under liquidation. The
liquidators of PQR Ltd. have filed a suit asserting some claims against the company. The
ultimate outcome of the litigation cannot be determined and hence, no provision for any
liability has been recognized in accompanying consolidated financial statements.

(C) Qualified Report – Scope Restriction

Auditor’s Report
(Same introductory paragraph as of a standard unqualified report)
As discussed in Note 10, client’s legal counsel has not replied to a letter of inquiry regarding
contingent liabilities relating to third-party guarantee of ` 80,000 and warranty claim worth `
50,000.

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AUDIT REPORT 11.9
In our opinion, except for the effects of such adjustments/ disclosures in the financial
statements of the matter referred above, the financial statements give…. (remaining words
same as that of a standard unqualified audit report).

(D) Qualified Report – Disagreement With Management

Auditor’s Report
(Same introductory and scope paragraphs as of a standard unqualified report)
As stated in Note 7, debtors include an amount of `…… owed by P Ltd., which has been placed
under liquidation since the year-end. The liquidator has indicated that unsecured creditors are
unlikely to receive any payment. In our opinion, the provision for doubtful debts should be
made on the full amount. Due to such an adjustment not being made in the financial
statements, the provision for doubtful debt has been understated by ` ……. This has resulted in
overstatement of profits and sundry debtors by ` ……. with consequent effect on the earnings
per share.
In our opinion, except for the effects on the financial statements of the matter referred above,
the financial statements give…… (remaining words same as of a standard unqualified report
opinion paragraph).

(E) Disclaimer of Opinion – Limitation of Scope

Auditor’s Report
(Same introductory paragraph as that of a standard unqualified report but omit the sentence
stating the responsibility of the auditor.)
(Omit or amend the scope paragraph)
The company did not conduct a physical count of inventory during the year, stated in the
financial statements at `……. as on March 31, 20XX. Further, evidence supporting the cost of
property and equipment acquired during the year is not available. The company’s records do
not permit the application of other auditing procedures to inventory and equipment.
Because of the significance of the matters discussed in the preceding paragraph, we do not
express an opinion on financial statements.

(F) Adverse Report

Auditor’s Report
(Same introductory and scope paragraphs as that of a standard unqualified report)
Deferred expenditure on development of patent rights for ‘TRIOCIN’, a drug developed for
treatment of IDS by the company, is included in the balance sheet at ` D. The success rate of
the drug for the said treatment and side effects are not yet known i.e. clinical acceptability has
not been demonstrated. In our opinion, Accounting Standard – 26, Intangible Assets, would
require this expenditure to be written off to profit and loss accounts of the year under audit as
availability of product for use and sale is not yet demonstrated.

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AUDIT REPORT 11.10
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s),
and to the best of our information and according to the explanations given to us, the financial
statements do not give a true and fair view in conformity with the accounting principles
generally accepted in India:
(a) In case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 20XX,
and
(b) In case of the Profit and Loss account, of the profit/loss for the year ended on the date.

Reports on Accounts of Sole Traders and Partnerships

There is no statutory form of auditor’s report in the case of sole traders and partnerships. Often the
auditors of sole traders and firms have nothing to say on the audited accounts except “Audited and
found correct” or “Examined and found correct”. This form of reporting is not recommended as it
gives no indication of the extent of the examination of accounts that has been carried out.

The Standard on Auditing regarding “Engagements involving Compilation of Financial Statements”

to provide guidance on the professional responsibilities of the members of the ICAI, when an
engagement to compile financial statements or other financial information is undertaken and the
form and content of the report issued in connection with such a compilation so that the association
of the name of the member with the financial statements is not misconstrued by a user of the
statements as the same having been audited by him. For the member, the objective of a compilation
engagement is to use accounting expertise, as opposed to auditing expertise, to collect, classify and
summarise financial information, This ordinarily entails reducing detailed data to a manageable and
understandable form without the requirement to test the assertions underlying that information.
The procedures employed are not designed and do not enable the member to express any opinion
on the financial information. However, users of the compiled financial information derive some
benefit as a result of the member’s involvement because the service has been performed with
professional competence and due care. It is essential that the member clearly brings out the nature
of association with the financial statements and the nature of the work performed by him. The
following recommendations are made in this regard:
1. The title of the report should be
“ACCOUNTANT’S REPORT ON UNAUDITED FINANCIAL STATEMENTS AND NOT AN AUDITOR’S
REPORT”.
2. The report should be addressed to the appointing authority.
3. The report should identify the financial information compiled, also stating that it is based on the
information provided by the management.
4. The report should clearly state that the financial statements are not audited.
5. In describing the engagement, ambiguous terms such as ‘review’, ‘general review’, ‘check’ etc.,
should not be used.
6. Date of the report should be mentioned.

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AUDIT REPORT 11.11
7. Name and address of the firm and of the member appointed for carrying out the compilation
engagement should be mentioned.
8. Signatures and the designation (sole proprietor/partner) and membership number should
appear in the report.

Example of an Accountant’s Report on Unaudited Financial Statements

To.......
On the basis of information provided by management we have compiled the balance sheet of ..........
(name of the entity) as of March 31, XXXX and the statement of profit and loss for the period then
ended. The balance sheet and the statement of profit and loss are in agreement with the books of
account. We have not audited or reviewed these financial statements and accordingly express no
opinion thereon.
Date:
For A & Co.
Signature (Name of the partner and membership number)
Partner
Chartered Accountants

Companies (Auditor’s Report) Order, 2016

Applicability of the Order
In exercise of the powers conferred by Section 143(11) of the Companies Act, 2013 and in
supersession of the Companies (Auditor’s Report) Order, 2015, the Central Government hereby
makes Companies (Auditor’s Report) Order, 2016.
1. Applicable on every Audit Report issued with effect from 1st April 2016 on the financial
statements for the period 2015-16 by the auditor.
2. Provided the Order shall not apply to the auditor’s report on Consolidated Financial Statements
3. It shall apply to every company including a foreign company as defined in Section 2(42) of the
Companies Act, 2013.
4. The Order is also applicable to the audits of branches of a company since a branch auditor has
the same duties in respect of audit as the company’s auditor. It is, therefore, necessary that the
report submitted by the branch auditor contains a statement on all the matters specified in the
Order.

Companies not Covered by the Order

1. Banking company
The Order would not also apply in case of non-banking finance company, which converts into a
banking company and as on the balance sheet date is a banking company.
2. Insurance Company
3. Not for Profit Company licensed to operate under section 8 of the Companies Act, 2013.
Section 8 applies to companies which have been formed or are about to be formed as limited

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AUDIT REPORT 11.12
companies for promoting commerce, art, science, religion, charity or any other useful object
and which apply or intend to apply their profits, if any, or other income in promoting their
objects and prohibit the payment of any dividend to their members. Such companies are usually
in the form of clubs, chambers of commerce, research institutions, etc.
4. One Person Company as defined in Sec. 2(62) of Companies Act, 2013.
5. Private Limited Company (not being a subsidiary or holding company of a public company) with
a paid up capital and reserves and surplus not more than ` 1 crore as on the balance sheet date
and which does not have total borrowings exceeding ` 1 crore from any bank or financial
institution at any point of time during the financial year and which does not have a total
revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from
discontinuing operations) exceeding ` 10 crores during the financial year as per the financial
statements.

Note:
1. Paid-up share capital would include both equity share capital as well as the preference share
capital. Share Application money should not be considered as part of the paid up capital.
2. Both capital as well as revenue reserves should be taken into consideration while computing
the limit of ` 1 crore prescribed for paid-up capital and reserves.
3. Revaluation reserve, if any should also be taken into consideration while determining the figure
of reserves for the limited purpose of determining the applicability of the order.
4. The debit balance of the profit and loss account, if any, should be reduced from the figure of
revenue reserves.
5. Loans from banks or financial institutions are normally in the form of term loans, demand loans,
working capital limits, cash credits, overdraft facilities, bills purchased or discounted.
6. It is clarified that since the words used by the order are ‘any bank or financial institution’, the
limit of exceeding ` 1 crore applies in aggregate to all loans.
7. Interest accrued but not due shall not form part of loan outstanding. But interest accrued and
due shall form part of loan outstanding.
8. It defines the term “Revenue” as the aggregate amount for which sales are affected by the
company.
9. It may be noted that the “sales effected” would include sale of goods as well as services
rendered by the company. Following should be considered:
(a) Sales tax collected or excise duties collected should not be taken into account if they are
credited separately to sales tax account or excise duty account;
(b) Trade discounts should be deducted from the figure of turnover;
(c) Commission allowed to third parties should not be deducted from the figure of turnover;
and
(d) Sales returns should be deducted from the figure of turnover even if the returns are from
the sales made in the earlier years.
10. Reserve = Capital Reserve + Revaluation Reserve + (Revenue Reserve – Debit Balance of P/L).

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AUDIT REPORT 11.13
11. (Revenue Reserve – Debit Balance of P/L) to be considered only if + ve.

Matters to be included in the Auditor’s Report

S.N. Matter Details
1 Fixed Assets (a) Whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed
assets;
(b) Whether these fixed assets have been physically verified 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 accounts;
(c) Whether the title deeds of immovable properties are held in the
name of the company. If not, provide the details thereof.
2 Inventory Whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether any material
discrepancies were noticed and if so, whether they have been properly
dealt with in the books of accounts.
3 Loan to Parties Whether the company has granted any loans, secured or unsecured to
covered u/s 189 companies, firms, Limited Liability Partnerships or other parties
covered in the register maintained under section 189 of the
Companies Act, 2013. If so,
(a) Whether the terms and conditions of the grant of such loans are
not prejudicial to the company’s interest;
(b) Whether the schedule of repayment of principal and payment of
interest has been stipulated and whether the repayments or
receipts are regular;
(c) If the amount is overdue, state the total amount overdue for more
than 90 days, and whether reasonable steps have been taken by
the company for recovery of the principal and interest.
4 Loan, Investments, In respect of loans, investments, guarantees, and security whether
Guarantees, and provisions of section 185 and 186 of the Companies Act, 2013 have
Security been complied with. If not, provide the details thereof.
5 Deposits In case, the company has accepted deposits, whether the directives
issued by the Reserve Bank of India and the provisions of sections 73
to 76 or any other relevant provisions of the Companies Act, 2013 and
the rules framed thereunder, where applicable, have been complied
with? If not, the nature of such contraventions be stated;
If an order has been passed by Company Law Board or National
Company Law Tribunal or Reserve Bank of India or any court or any
other tribunal, whether the same has been complied with or not?

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AUDIT REPORT 11.14
6 Cost Accounting Whether maintenance of cost records has been specified by the
Records Central Government under section 148(1) of the Companies Act, 2013
and whether such accounts and records have been so made and
maintained.
7 Statutory Dues (a) Whether the company is regular in depositing undisputed statutory
dues including provident fund, employees’ state insurance, income-
tax, sales-tax, service tax, duty of customs, duty of excise, value
added tax, cess and any other statutory dues to the appropriate
authorities and if not, the extent of the arrears of outstanding
statutory dues as on the last day of the financial year concerned for
a period of more than 6 months from the date they became
payable, shall be indicated;
(b) Where dues of income tax or sales tax or service tax or duty of
customs or duty of excise or value added tax have not been
deposited on account of any dispute, then the amounts involved
and the forum where dispute is pending shall be mentioned.
8 Defaulter Company Whether the company has defaulted in repayment of loans or
borrowing to a financial institution, bank, government or dues to
debenture holders? If yes, the period and the amount of default to be
reported (in case of defaults to banks, financial institutions, and
government, lender wise details to be provided).
9 End use of Money Whether moneys raised by way of initial public offer or further public
raised offer (including debt instruments) and term loans were applied for the
purposes for which those are raised. If not, the details together with
delays or default and subsequent rectification, if any, as may be
applicable, be reported.
10 Fraud Whether any fraud by the company or any fraud on the Company by
its officers or employees has been noticed or reported during the year;
if yes, the nature and the amount involved is to be indicated.
11 Managerial Whether managerial remuneration has been paid or provided in
Remuneration accordance with the requisite approvals mandated by the provisions of
section 197 read with Schedule V to the Companies Act? If not, state
the amount involved and steps taken by the company for securing
refund of the same.
12 Nidhi Company Whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1: 20 to meet out the liability and whether
the Nidhi Company is maintaining 10% unencumbered term deposits
as specified in the Nidhi Rules, 2014 to meet out the liability.

13 Related Party Whether all transactions with the related parties are in compliance

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AUDIT REPORT 11.15
disclosure with section 177 and 188 of Companies Act, 2013 where applicable
and the details have been disclosed in the Financial Statements etc., as
required by the applicable accounting standards.
14 Preferential Whether the company has made any preferential allotment or private
Allotment placement of shares or fully or partly convertible debentures during
the year under review and if so, as to whether the requirement of
section 42 of the Companies Act, 2013 have been complied with and
the amount raised have been used for the purposes for which the
funds were raised. If not, provide the details in respect of the amount
involved and nature of noncompliance.
15 Non-Cash Whether the company has entered into any non-cash transactions
Transactions with with directors or persons connected with him and if so, whether the
Directors provisions of section 192 of Companies Act, 2013 have been complied
with.
16 NBFC Whether the company is required to be registered under section 45-IA
of the Reserve Bank of India Act, 1934 and if so, whether the
registration has been obtained.

Signing of the Audit Report

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.
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.

Statutory Report
The auditor 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:
1. Examine the internal check with regard to the control over amounts collected; and
2. 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.

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AUDIT REPORT 11.16
In addition, he should carry out an audit of the issue of shares. The under mentioned steps are
also necessary:
3. Vouch the payment of the underwriting commission.
4. 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.
5. Vouch the payment of Preliminary Expenses and see that the amount paid does not exceed the
amount fixed by the Articles or the Prospectus.
6. 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.
7. 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.
8. 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.

Exercise
Q1. Comment :
(a) The auditor fails to obtain sufficient information to form an overall opinion on the
matters contained in the financial statements. [Nov 2002]
(b) The auditor does not agree with affirmation made in the financial statements.
Ans. (a) The auditor issues a disclaimer of opinion if the subject-matter involved is material and
pervasive and he is unable to obtain sufficient appropriate evidence to express an
opinion on it. If the subject-matter is not material and pervasive then he may issue a
qualified opinion. In the present case, the auditor has failed to obtain sufficient
information to form an overall opinion on the matters contained in the financial
statements i.e., is not able to obtain pervasiveness of the subject-matter and hence his
failure to form an opinion. Therefore, the auditor may give a disclaimer of opinion in the
audit report.

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AUDIT REPORT 11.17
(b) In case, the auditor has a disagreement with management as to an affirmation in the
financial statement, he may give a qualified opinion or an adverse opinion depending
upon the materiality and pervasiveness of the subject-matter.

Q2. ABC Ltd. has not deposited provident fund contributions of ` 20 lakhs to the authorities but
accounted in the books. [Nov 2003]
Ans. In the present case the company has not deposited the amount of provident fund
contribution of ` 20 lakhs with the appropriate authority. The auditor should, according to the
requirements of CARO, 2016, indicate the extent of arrears outstanding for more than 6
months, from the date they have become payable, in his audit report.

Q3. Comment:
The auditor of a limited company has given a clean report on the financial statement on the
basis of Xerox copies of the books of account, vouchers and other records which were taken
away by the Income-tax Department in search under section 132 of the Income-tax Act, 1961.
[Nov 2004]
Ans. 1. Certificate from management : The auditor should obtain a representation/ certificate
from management to establish the reliability of evidence i.e., Xerox copies of books of
account, vouchers and other records.
2. Adopt appropriate audit procedures : The auditor should adopt appropriate audit
procedures like confirmation of balances from debtors/ creditors, bank statement,
analytical procedures, etc. and obtain evidence to corroborate the information contained
in management representation.
3. Modify the audit report : Depending upon the fact as to whether he has been able to
obtain sufficient appropriate audit evidence and materiality and pervasiveness of the
information, the auditor may give a qualified opinion or a disclaimer of opinion as per
requirements of SA 700. The latter is issued when the matter involved is material and
pervasive otherwise the auditor may give a qualified opinion.

Q4. As an auditor, comment on the followings situations/ statements:

(a) Travelling expenses of ` 2.25 lakhs shown in Profit and Loss Account of X Ltd., including a
sum of ` 1.10 lakhs spent by a Director on his foreign travel for Company’s business
accompanied by his mother for her medical treatment.
(b) X Ltd., to whom Companies (Auditor’s Report) Order, 2016 is applicable, has issued 9%
Debenture of ` 5 crores, redeemable after 5 years and used the proceeds of issue for
payment of Sundry Creditors and other current Liabilities of ` 2.80 crores.
Ans. (a) According to section 143(1) of the Companies Act, 2013, the auditor has a duty to
enquire and report by exception on six specified matters. One of the items being whether
personal expenses have been charged to revenue. If this has happened, the auditor must
state this in his audit report.

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AUDIT REPORT 11.18
Present case –In the given situation, the auditor should vouch travelling expenses in the
usual manner. If the director has spent entire time for company’s business, the amount
of ` 1.10 lakhs spent by him on foreign travel should be charged to the revenue of the
company. If the director has, alongwith attending the company’s business, spent time
on medical treatment of his mother, then the auditor should suggest a reasonable basis
to allocate a part of ` 1.10 lakhs to be charged to the profit and loss account of the
company and the rest to be treated as personal expenses.
(b) CARO, 2016
(i) Under CARO, 2016 in case of issue of debentures, the auditor has to report whether
securities have been cheated in respect of debentures issued.
(ii) In cases of maturity mismatch i.e, long term funds being used for funding working
capital or vice versa, under CARO, 2016, the auditor has to report on the same.
(iii) In the given situation, the auditor should report whether securities have been
created for the 9% Debentures of ` 5 crores issued by the company. For this, he
should examine the debenture trust deed executed and compliance regarding
creation of charge.
(iv) The company has used proceeds out of (long-term) 9% Debentures to pay (short-
term) sundry creditors and current liabilities. This is a case of maturity mismatch.
The auditor, under CARO, 2016 has a duty to report on it.

Q5. JKT Ltd. having ` 40 lacs paid up capital, ` 9.50 lacs reserves and turnover of last three
consecutive financial years, immediately preceding the financial year under audit, being ` 4.90
crores, ` 4.50 crores and ` 6 crores, but does not have any internal audit system. In view of
the management, internal audit system is not mandatory. [Nov 2006]
Ans. CARO 2016 and Internal audit
(i) According to CARO 2016, in case of specified companies, the statutory auditor is
required to report whether the internal audit system of the company is commensurate
with the size and nature of the business of the company.
(ii) A specified company has been defined as a company whose paid-up capital and reserves
are not more than fifty lakh rupees or whose average annual turnover for the last three
financial years preceding the present financial year exceeds five crore rupees.
Present case – In the present case, if we assume that CARO, 2016 is applicable to JKT Ltd.,
then it is a specified company since its average annual turnover for the last three preceding
years is ` 5.33 crores. In view of this, it is advisable to have an internal audit system. If it is not
there, the auditor may issue a qualified report under CARO, 2016.

ELITE CONCEPTS CA. RAJ K AGRAWAL