Reporting requirements

under Companies Act

and SAs
 Contents of Audit Report

Introductory
Title Addressee
paragraph

Scope Opinion Date of the

paragraph paragraph report

Place of Auditor’s
signature signature
Significance of Opening paragraph
 The Opening or Introductory Paragraph identifies the Financial Statements of
the entity that have been audited, including the date of and period covered by
the Financial Statements.

 The ‘Opening Paragraph’ seeks to bring to the notice of the Users of Financial
Statements, that preparation of the accounts is the responsibility of the
Management of the enterprise, whereas the responsibility of the Auditor is to
express an opinion on the said accounts based on the audit carried out by him.

 Through the Opening Paragraph, the Auditor communicates the basic message
that the preparation of Financial Statements requires Management to make
significant accounting estimates and judgements, as well as to determine the
appropriate accounting principles and methods used in preparation of the said
Financial Statements.
Significance of Scope Paragraph
 The ‘Scope Paragraph’ seeks to inform the Users about the practices and
procedures followed in the conduct of audit by the Auditor.

 In the Scope Paragraph, the Auditor states that the audit was planned and
performed in accordance with Standards on Auditing generally accepted in
India, and also that the audit provides a reasonable basis for his opinion.

 The significance of the Scope Paragraph lies in the fact that the Auditor intends to
convey to the readers of his report, about the scope of audit by highlighting the
nature and progress of audit.

 The basic objective of auditing that the Auditor provides only “reasonable
assurance” is emphasized in the Scope Paragraph. Thus, this paragraph signifies
the inherent limitations of audit.
 Unqualified Opinion
 An opinion is said to be unqualified, 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 the following –
 The Financial Statements have been prepared using the Generally Accepted
Accounting Principles, which have been consistently applied,
 The Financial Statements comply with relevant statutory requirements
and regulations, and
 There is adequate disclosure of all material matters relevant to the proper
presentation of the financial information, subject to statutory requirements,
where applicable.
 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.
Auditor has to satisfy the following:
 Evidence
 Accounting standards and principles
 True and fair
 Classification
 Format (Schedule III)
 Free from misstatements
 Disclosure
Modified Audit report
As per SA – 705, The report is said to be modified, if it includes:
 Qualified Opinion,
 Adverse Opinion and
 Disclaimer of Opinion
The aforesaid types of opinion affects the audit opinion.

 Note: As per SA – 706, Emphasis of matters paragraph and other

matters paragraph does not affect the auditor’s opinion
[(E.g.) Going concern not resolved, Significant uncertainty.]
Qualified opinion/report
 A Qualified Audit Report is one where an Auditor gives an opinion on the truth
and fairness of Financial Statements, subject to certain reservations.

 The Auditor’s Reservation is generally stated as: “Subject to the above, we

report that the Balance Sheet shows a true and fair view.”

 A Qualified Opinion should be expressed when the Auditor concludes that –

 An Unqualified Opinion cannot he expressed, or
 The effect of any disagreement with Management is not so material and
pervasive as to require an Adverse Opinion, or
 The Limitation on scope is not so material and pervasive as to require a
Disclaimer of Opinion.
Features of qualified report:
Placement
[Audit report
Clarity Explanation or annexure to
audit report]

Nature of Violation of
“Subject to”
qualification law

Quantification
Disclaimer of opinion
 A Disclaimer of Opinion Report is given when the Auditor is unable to form
an overall opinion about the matters contained in the Financial Statements.
 A Disclaimer of Opinion should be expressed when the possible effect of a
limitation on scope is so material and pervasive that the Auditor has not been
able to obtain sufficient appropriate audit evidence and is, accordingly,
unable to express an opinion on the Financial Statements.
 It may happen in situations such as -- (a) when books of account of the
Company seized by Income Tax Authorities, (b) when it is not possible for the
Auditor to obtain certain information or (c) when scope of audit work is
restricted.
 The Auditor will state in his Report that he is unable to term an opinion on the
Financial Statements. Such Report is called as “Disclaimer of Opinion
Report”.
Adverse or negative report
 An Adverse or Negative Report is given when the Auditor concludes that based
on his examination, he does not agree with the affirmations made in the
Financial Statements / Financial Report.

 The Auditor states that the Financial Statements do not present a true and fair
view of the state of affairs and the working results of the organisation. The
Auditor should state the reasons for issuing such a report.

 An Adverse Opinion should be expressed when the effect of a disagreement is

so material and pervasive to the Financial Statements, that the Auditor
concludes that a qualification of the report is not adequate to disclose the
misleading or incomplete nature of the Financial Statements.
Difference between explanatory notes and qualificatory
notes
S.No Explanatory notes Qualificatory notes
1 Given by the Management to the Given by the auditor to the
auditor to give an explanation. stakeholders.

2 Does not indicate the adverse May indicate an adverse opinion from
effect as it is merely an explanation. the auditor.

3 Will be shown under notes to Included in the auditor’s report before

accounts the opinion paragraph. The word
“subject to” will be presented in the
notes.
Difference between qualified report and adverse report
S.No Qualified report Adverse report
1 Auditor gives an opinion subject Auditor does not agree with the
to certain reservations affirmations given by the management
2 Accounts present a true and fair Accounts do not present a true and fair
view subject to certain view
reservations
3 Issued by the auditor when the Financial records do not comply with
financial records have not been the GAAP and it contains material
maintained in accordance with misrepresentation.
GAAP but no misrepresentations
have been identified.
Difference between clean audit report and qualified audit report
S.No Clean audit report Qualified audit report
1 Financial statement shows a true and fair The auditor is unable to give a clean report
view of the business because of the reservations in the audit
and the reservation is stated as “subject to
the above, we report the balance sheet
presents true and fair view”

2 When the auditor gives a clean audit We can assume that where there could be a
report, we can assume that the financial disagreement which is not material and
statements are free from material pervasive enough to give an adverse
misstatements, sufficient reliable evidence opinion and the limitation on scope is not
has been obtained. material to issue a disclaimer to opinion.

3 No duties for the management in respect The management must give a clear
of a clean report. explanation in respect of each qualification
which is presented by the auditor.
Responsibility of the management and the auditor
 There is a possibility that the auditor may not know the complexities of the
business for which the management is responsible to submit the information.

 If any of the information are deliberately withheld from the auditor, he will
not be held responsible for it and if by any means the auditor has a chance of
examining the transaction and he chose to omit that vital information that is
material which caused a fraudulent activity, then the auditor will be held
responsible for it.
Companies Audit Report Order
(CARO), 2020
Non-Applicability:
Banking company

Insurance company

Section 8 Company

OPC and Small company

Private limited company with Paid up capital ≤ ₹1 crore and

Borrowings at any point ≤ ₹1 crore and Turnover ≤ ₹10 crore.
Paragraph 3: Matters to be included in audit report
Fixed Assets Proper record of PPE, Intangible assets.

PPE physically verified at regular intervals and discrepancies, if

any.

Title deeds of immovable property held in the name of company.

Company has revalued PPE and specify the change ≥ 10%.

Any pending proceedings for holding property as Benami.

Paragraph 3: Matters to be included in audit report
Inventory Physical verification of inventory at reasonable intervals and change ≥
10%
Company has been sanctioned working capital limit > ₹5 crore from
banks and whether quarterly return filed by company with banks.

Investments, Whether company provided loans/advances/guarantees to group or

Loans and others.
Advances
Terms and conditions not prejudicial to the interests of company.
Schedule for principal and interest for Loans.
Specify amount overdue for more than 90 days.
Amount of loans extended/renewed/Fresh loans granted to the same
party.
Amount of loans granted to promoters/related parties.
Paragraph 3: Matters to be included in audit report
 Whether loans/advances under Section 185, 186 complied with.
 In respect of deposits, whether Section 73 to 76, RBI directives, Orders of
NCLT, CLB, RBI complied with.
 Whether Cost records maintained.
 Whether transactions not recorded in books are disclosed as incomes under
Tax assessment.
Statutory Whether company is regular in depositing statutory dues
dues: and disclose arrears, if any for more than 6 months.

Whether statutory dues are not deposited due to any

dispute pending.
Paragraph 3: Matters to be included in audit report
Borrowings Whether company defaulted in repayment of principal and interest.
Whether company is declared as wilful defaulter by any Financial
Institution.
Whether term loans are utilized for the purposes they are obtained.
Whether fund raised on short term basis utilized for long term purpose.
Whether company has taken funds to meet the obligations of group Co.
Whether company has taken loan by pledge of group's security and
default.
Share capital Whether money raised by public offer utilized for the purposes they're
raised.
Whether company has made preferential allotment/private placement/
Convertible debentures during the year and complied section 42 and 62.
Paragraph 3: Matters to be included in audit report
Reporting of whether any fraud by the company or any fraud on the Company has
fraud been noticed or reported during the year. If yes, the nature and the
amount involved is to be indicated.
The auditor is also required to report whether any report u/s 143(12) of
the Companies Act has been filed by the auditors in Form ADT-4 as
prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014
with the Central Government;

whether the auditor has considered whistle-blower complaints, if any,

received during the year by the company.
Nidhi Company Whether Net owned fund to Deposit is 1:20.
Whether Nidhi Co. is maintaining 10% Unencumbered term deposit.

Whether there is default in repayment of deposit.

Paragraph 3: Matters to be included in audit report
 Whether transactions with related party is in compliance of Section 177 and 188.

Internal Audit Whether internal audit system commensurate with nature & size of
entity.
Whether reports of internal auditor are considered by auditor.

 Whether Non-cash transaction with directors by the Co. is in compliance of Section 192.

NBFCs Whether registration obtained u/s 45-IA of RBI Act, 1934.

Whether company has conducted any non-banking financial activities
without registration.
Whether company is a Core Investment Company (CIC).
Whether group has more than 1 CIC. If yes, indicate the No. of
companies.
Paragraph 3: Matters to be included in audit report
 Whether company has incurred cash losses in the financial year and indicate amt.

 Whether there is any resignation of statutory auditors.

 Whether Auditor is of the opinion that no material uncertainty exists and Co. is
capable of paying liabilities as and when it falls due within 1 year from B/S date.

 Corporate social responsibility: Whether company transferred unspent amount to a

fund specified in Schedule VII within 6 months of expiry.

 Whether there is any qualification or adverse remarks in the report of consolidated

financial statements.
Paragraph 4: Reasons to be stated for unfavourable or
qualified answers
 Where, in the auditor's report, the answer to any of the questions referred to
in paragraph 3 is unfavourable or qualified, the auditor's report shall also
state the basis for such unfavourable or qualified answer, as the case may
be.

 Where the auditor is unable to express any opinion on any specified matter,
his report shall indicate such fact together with the reasons as to why it is
not possible for him to give his opinion on the same.
Revision of the audit report
 The auditor can request the management to revise the financial statement.

 If the management agrees to revise the financial statement, the auditor has to
issue a revised report mentioning about the earlier report and the reasons for its
revision.

 For a body corporate, the audit report can be revised till the accounts are
adopted at the AGM and where its not applicable the auditor can revise it
within a reasonable time.
Revision of the audit report
 The continuing auditor may consider that the revision of financial statements
and issuance of revised audit report is not required if the adequate
disclosures have been included in the audit report.
 If the management neither agrees to revise the financial statement nor
agrees to issue the revised audit report, the auditor should report it to those
charged with governance that actions will be taken against the management in
order to prevent reliance on the existing report.
 The auditor should notify the regulatory authorities and the original partner
who signed the audit report should sign the withdrawal from the engagement
and they should state the reasons.
Audit certificate
 It refers to a written confirmation of the accuracy of the facts stated therein
and does not involve any estimate or opinion.
 The auditor should get a declaration from the management about the subject
matter.
 The audit certificate should be on the letter head of the auditor.
 The limitation of the auditor has to be clearly mentioned in order to avoid
misunderstandings.
 The auditor should mention the way the audit was conducted whether he has
used any general statements like profit and loss which was audited by other
auditors.
Audit certificate
 The auditor should address the certificate to the client or the public authority
or the person requiring it or should mention as “to whom so ever it may
concern”.

 The audit certificate is not mandatory in every year and in the case of a wrong
certificate, the auditor will be held responsible.

 It guarantees the absolute correctness of the figures and information

mentioned in the certificate whereas the audit report may not guarantee
correctness of financial statement in absolute terms.
Difference between audit report and audit certificate
Basis Audit report Audit certificate
Meaning Audit Report is a statement Audit Certificate is a written
of collected and considered confirmation of the accuracy of the
facts so as to give a clear information stated there in.
picture of the business to the
persons who are not in
possession of the full facts.
Opinion Audit Report contains the Audit Certificate does not contain
opinion of the auditor on the any opinion but only confirms the
accounts accuracy of the figures with the
books of accounts.
Suggestion Audit Report may provide Audit certificate does not provide
suggestions for improvement any such suggestion.
Difference between audit report and audit certificate
Basis Audit report Audit certificate
Base Audit Report is based on the Audit Certificate is based on the
info obtained & books of particular data capable of
account verified by the auditor verification as regards accuracy.

Guarantee Audit Report may not Audit Certificate guarantees

guarantee correctness of absolute correctness of the figures &
financial statement in information mentioned in the
absolute terms. certificate.

Coverage Audit Report always covers While Audit Certificate covers only
entire accounts of the concern certain part of the accounts of the
concern.
Difference between audit report and audit certificate
Basis Audit report Audit certificate
Responsibility Audit Report does not hold Audit Certificate makes an auditor
auditor responsible for responsible if anything mentioned
anything wrong in the in the certificate found as wrong
accounts. later on.

Characteristics Audit Report is subjective Audit certificate is objective as it is

as it is opinion oriented. fact oriented.

Address Audit report is addressed to Audit Certificate is addressed to

the members of the particular person or sometimes
company at large or may include the words like “To
appointing authority, Whomsoever it may concern”.