AUDITING AND ASSURANCE II

Mrs.M.Loheswari
UNIT III
Following works are to be
Audit of impersonal ledger -
performed for the audit of the
Capital expenditure, deferred revenue
impersonal ledger:
expenditure and revenue expenditure,
Outstanding expenses and income,  Cash transactions are to be checked

Repairs and renewals, Distinction on the basis of cash book or

between reserves and provisions, journal. The postings of cash

Implications of change in the basis of transactions to the Impersonal

accounting. Audit of assets and Ledger should be carefully

liabilities. checked.
 Other impersonal transactions are

Audit of impersonal ledger to be recorded on the basis of

sufficient evidence. The Journal
Impersonal ledgers are also called
should be carefully vouched to
General Ledgers or Nominal Ledgers.
ensure that each entry is supported
Impersonal accounts refer to real accounts
by sufficient evidence. An auditor
and nominal accounts which are related to
has to check whether it is recorded
a trading account, profit and loss account,
on the basis of evidence or not.
and balance sheet.
Nominal accounts are related to  Special attention should be given

Trading and Profit A Loss Accounts while checking transfer entries

whereas real accounts record assets. So, if because it affects the final

there are any errors in such accounts, they accounts. The total of the

will affect adversely to the report and subsidiary books should be

financial statements which are to be signed checked.

by the auditor. Checking of such accounts  Totals and balances of the

is known as an audit of the impersonal impersonal ledger should be

ledger. It does not only assure the ratified with the balance shown in

correctness and reliability of nominal the trial balance. The balances in

accounts but also helps to detect the errors the Impersonal Ledger should be

which remain in personal accounts. Such checked and verified with the Trial

audit is conducted with the help of cash Balance.

book, journal and subsidiary books.  Reviewing truthfulness of debtor

balances in a customer account.
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Mrs.M.Loheswari
Opening balance of impersonal OUTSTANDING ASSETS AND
ledger should be verified with the LIABILITIES
audited account of the previous Arithmetical accuracy of
year. impersonal ledger is no proof that the
 Reviewing of Internal Control profit or loss has been correctly arrived at.
System. The auditor should If we omit certain expenses which have
thoroughly check the totals of the become due but have remained unpaid, the
various other books of original profit shown will be more. It is, therefore,
entry and also the postings of their necessary that all the expenses which
totals of the impersonal ledger. have been incurred during the current year
The Impersonal Ledger will be Vouched must be debited to Profit and Loss
as Follows : Account and shown as a liability in the
'1 The auditor should check postings of Balance Sheet. Similarly, there may be
various cils11 payments and receipts in certain incomes which might have accrued
respect of nominal accounts in the in the current year but not yet received. To
impersonal ledger. These transactions can ascertain the profits correctly, such
be salaries, wages, rent, etc, paid in cash or incomes should be credited to the Profit
dividends, interest, etc. received in cash. and Loss Account and shown as an . asset
2. The auditor should check the totals of in the Balance Sheet.
all the subsidiary books, and their postings It is. advisable that a
in the relevant nominal accounts in the 'Memorandum Book' containing details of
impersonal ledger. outstanding assets and liabilities is
3 In the case of transfer and adjustment maintained. This book should be signed by
entries from one impersonal account to a responsible officer. With the help of this
another which have been passed through book, 'the auditor can easily ascertain the
the journal, the auditor should see that outstanding and accrued items for which
everv entry is supported by sufficient the adjusting entries should have been
documentary evidence. passed. Through this book, the auditor can
4. The auditor should check various compare
adjustment entries made at the end of the outstandings and accruals of two different
year when final accounts are prepared. periods.
Such adjustments relate to outstanding We will now discuss some of
assets and liabilities . and depreciation etc. $&outstanding assets and liabilities and
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Mrs.M.Loheswari
the auditors duties about them. prepaid expenses are : insurance premium,
Vouching of Trading Transactions rent, rates and taxes, telephone bills, etc.,
and Impersonal Ledger which are generally paid in advance.
For vouching the prepaid expenses, the
Outstanding Assets auditor should scrutinise the relevant
An expenditure which has been normal accounts, the-demand notes,
incurred during the current year but the receipts, etc. and make sure that proper
benefit of which will be enjoyed during the adjustments have been made in the account
next year is called an outstanding asset. books. Ile should ensure that calculations
Outstanding assets can be of three types. in respect of prepaid expenses are correct.
These are: 2. Incomes Receivable or Accrued

 Prepaid expenses, Incomes:

 Incomes receivable (accrued These are incomes earned or accrued

incomes), or

 Deferred revenue expenditure. become due in the current year but not yet
received. For example, till the end of the
year on 31st December, rent for December
1. Prepaid Expenses:
might not have been received. Similarly, a
Prepaid expenses are those expenses
borrower of a loan might not been paid
which have been paid in the current year
interest for the last three months of the
but the benefit of which will be received in
accounting year. As these incomes have
the forthcoming year.
accrued in the current year, it is but natural
For example, if we pay an insurance
that such incomes should be credited to
premium of Rs. 12,000 for one year on 1st
current year's Profit and Loss Account.
April, 1989, then out of this expenditure
About such incomes, the auditor would
(Rs. 3,000) relates to the next year (from
make sure that they will be duly received,
January to March 1990). Thus, Rs. 3,000
and that the calculations are correct.
should not be charged to the Profit and
3. Deferred Revenue Expenditure:
Loss Account of the year 1989. If we do
According to Prof. Arnold Johnson
so, the profits for 1989 will unjustifiably
deferred revenue expenditures are those
get reduced by Rs. 3,000. To arrive at
"non-recurring expenditures which are
correct profit for the current year this
expected to be of financial benefits to
amount of Rs. 3,000 should be deducted
several accounting periods of
from total expenditure,. Examples of
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Mrs.M.Loheswari
indeterminable total length". The benefit
of
deferred revenue expenditure is likely to
be enjoyed not only in the current year but
also In some more years to come.
Examples of such expenditures are heavy
expenses on special advertisement
campaign for introducing a new product,
research and development expenditure,
heavy expenditure on repairs of
machinery, discount allowed on issue of
shares, etc.
Full amount of such expenditure is
not debited to the Profit and Loss Account
for the year in which it ?s incurred. On the
other hand, it is spread over the number of
years during which the benefit is likely to
be enjoyed and only a proportionate
amount is debited to the Profit and Loss
Account. For example, if Rs. 40,000 have
been spent on heavy repairs to a machine
which will continue to be useful for
coming four years, every year 114 of Rs.
40,000 i.e., Rs. 10,000 should be debited
to the Profit and Loss Account.
For vouching deferred revenue
expenditures, the auditor should check the
details of computation of the amount
carried forward and see that the charge
made to current years' Profit and Loss
Account is reasonable. He should
scrutinise the basis on which the estimates
have been prepared and satisfy himself that
these are reasonable.
Outstanding Liabilities
The expenses which have become
due for payment and should have been
paid during the current year but have not
been actually paid are called 'outstanding
liabilities'. For example, the rent of the
building for the month of December, 1990,
should have been paid during the j year
1990, but has not actually been paid during
the same period. Since rent for the month
of December, 1990 relates to the
accounting year 1990, it must be debited to
the Profit and 1oss Account and shown as
a liability in the Balance Sheet. If
outstanding liabilities are not charged to
the Profit and Loss Accounts, the final
account will.not show the correct amount
of profit or loss, and the Balance Sheet
will also be erroneous.
Following are some of the outstanding
liabilities:
1) Incomes received in advance:
It refers to that income which has been
received in the current year by way of an
advance, but relates to the next year. For
example, a tenant may pay advance rent in
the current year for January. This rent, no
doubt, has been received in the current
year, but it relates to the next year and
hence it should not be credited to the
current year's Profit and Loss Account.
The auditor should carefully such items
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Mrs.M.Loheswari
and ensure that all receipts which pertain
to the next year should be treated as on
earned income and are shown as a liability
in the Balance Sheet.
2) Unpaid or outstanding expenses:
Expenses which pertain to the current
year and should have been paid but have
not actually been paid during the same
year are called unpaid or 'outstanding
expenses'. All such expenses should be
charged to the current year's Profit and
Loss Account and shown as a liability in
the Balance Sheet. To find out the
outstanding expenses, the auditor should
examine all nominal accounts, receipts,
invoices, demand notes, etc. He should
ensure that these have been charged to
Profit and Loss Account and shown as a
liability in the Balance Sheet.
3) Purchases made at the close of
the year:
Many a times, it happens that
purchases
made at the close of the year are received
and entered in the stock register, but no
entry is made in the Purchases Book with
the result that purchases are understated
and profit gets inflated. The auditor should
call for a schedule of such purchased and
ensure that Purchases Account is debited
with their total amount and the amount is
shown as a
liability in the Balance Sheet. To check
unrecorded purchases, the auditor should
compare Goods Inwards Book with
Purchases Book for few days before the
close of the year.
4) Outstanding Rent, Rates and
Taxes:
If rent, rates and other taxes relating to
the current year have not been paid by the
time the books are closed, these must be I
ascertained and debited to the Profit and
Loss Account and shown as a liability.
Failure to do so will inflate the profit for
the current year. The auditor I should
inspect the ledger accounts, the demand
notes, receipts, etc, in order to ascertain
such outstanding expenses. He can also
make comparison of the current year's I
figures of the preceding years to assess the
amounts payable.
5) Outstanding Wages and Salaries:
It so happens that accounts are closed
on the last day of the last month of the year
but the wages and salaries for that month
are paid on the first day of the next month
in the next year. For example, the accounts
may be closed on 31st March but the
wages and salaries for March may be paid
on 1st April. If this is done, current a year's
Profit and Loss Account will be debited
with wages and. salaries for eleven months
and not twelve months. The profit revealed
by Profit and Loss Account will thus get
inflated. Hence, it is necessary to include
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Mrs.M.Loheswari
the wages and, salaries for March while
debiting this item to the current year's
Profit and Loss Account and to show
wages and salaries for March in the
Balance Sheet as a liability.
6) Audit Fee:
There are two opinions on showing audit
fee for auditing current year's accounts as
an outstanding liability. Some say it should
not be shown as current year's Vouching
and Verification expenditure because the
audit work of current year's account is
done in the next year and so it is next
year's expense. Others say that audit fee is
paid for the work of the current year and
hence, it should be charged to the current
year's Profit and Loss Account and shown
as a liability in the Balance Sheet. Both
these arguments appear to be sound. Now
it is an accepted principle that if the audit
work starts in the current year the audit fee
should be debited to Profit and Loss
Account of the current year and if the audit
work commences in the succeeding year,
the audit fee should be charged to that year
and not shown as an outstanding liability
of the current year.
7) Other Liabilities:
There can be various other outstanding
liabilities for expenses like freight and
carriage, travellers' and agents'
commission, etc. The treatment of these
liabilities should be the same as that of the
outstanding wages and salaries, if the
expenses relate to the current accounting
year these must be debited to the Profit and
Loss Account of the current year, whether
they have been paid or not.
Capital and Revenue Expenditure
According to Guidance Note on
terms used in financial statements issued
by ICAI, “Expenditure is incurring a
liability, disbursement of cash or transfer
of property for the purpose of obtaining
assets, goods or services”. Thus
expenditure may or may not involve
outflow of cash. It includes the purchase of
capital or long-lived asset, goods for the
purpose of sale or for getting services.
Expenditures are divided into three
categories :
 capital expenditure
 revenue expenditure, and
 deferred revenue expenditure
1. Capital Expenditure
Expenditure that acquires a capital asset is
capital expenditure. If it acquires stock-in-
trade, then it is revenue expenditure. A
capital asset is one that is used in or for the
purposes of the business and not meant for
sale in the ordinary course of business of
the enterprise. Purchase of stock-in-trade is
not capital expenditure as it is sold in the
ordinary course of business. Expenditure
on the purchase and installation of
machinery is a capital expenditure. Further
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Mrs.M.Loheswari
when an expenditure is made with a view of the plant.
to bringing into existence an asset or 2. Revenue Expenditure
advantage for the enduring benefit of trade If an expenditure is made not for
is a capital expenditure in the absence of the purpose of bringing into existence any
special circumstances leading to the capital asset or advantage of enduring
opposite conclusion. nature but for running the business or
The following are the examples of working it with a view to produce the
capital expenditure : profits is revenue expenditure. Such
 Expenditure incurred for expenditure benefits the current period
acquisition of fixed tangible assets only. It is incurred to maintain the existing
such as land, building, machinery, earning capacity of the business. For
furniture, motor vehicle etc. example, the amount spent on purchase of
 Expenditure incurred for stock-in-trade is of revenue nature.
improvement or extension of fixed Administrative expenses and selling and
assets such as increasing the distribution expenses are other examples
seating capacity of a theatre. of revenue expenditure.

 Expenditure incurred to bring the 3. Deferred Revenue Expenditure

fixed assets to the place of their use Deferred revenue expenditure is a

and expenditure incurred on their revenue expenditure by nature but it is not
installation or erection such as treated as revenue expenditure on the
freight on fixed assets, wages paid ground that its benefit is not fully
for installation. exhausted in the accounting period in

 Expenditure incurred for the which it is incurred. The Guidance Note on

purchase of intangible assets such ‘Terms used in Financial Statement’,

as goodwill, patent rights, and issued by the Institute of Chartered

trademarks, copyright, etc. Accountant of India, states that “Deferred

 Expenditure incurred for revenue expenditure is that expenditure for

reconditioning of old fixed assets which payment has been made or a

such as expenditure incurred on liability incurred but which is carried

repairing or overhealing of forward on the presumption that it will

secondhand machinery. benefit over a subsequent period or

periods.”
 Major repairs and replacement of
Difference between Reserves and
plant which increase the efficiency
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Mrs.M.Loheswari
Provisions:
Verification of Assets
Verification of assets means checking the
right side of the balance sheet. This means
when the auditor examines the right-hand
side of the balance sheet then it is
considered as verification of assets.
Verification of assets is done to examine
the total assets which the company has.
Let’s make it more clearly with an
example.
A company buys a machine of ₹ 50000
and now the rate of that machinery is ₹
20000. So to examine, was the cost of that
machinery ₹ 50000 or something else. For
this verification of assets used. There are
three objectives for the verification of
assets.
And those three verifications are as
follows:-
1. Verification of the existence of assets
2. Valuation of assets
3. Authority of their existence
1. Verification of the existence of assets
Through this objective, it examines
that how many assets were before and how
many assets are there at present. This
method helps companies to find out the
profit and loss of the company if he
compares their assets from before to after.
2. Valuable assets
This process examines how much
money a company is. Because to make a
better path for the company to grow it’s
very important to their financial
statements. And by using this objective it
has become very easier to know the
financial statements of the company.
3. Authority of their existence
Authority of existence shows that who
came more assets for the company which
help company to increase their shares in
the market.
Verification of liabilities
Verification of liabilities implies an
inquiry where the following things have
been checked:-
• When verification of liabilities occur
then the check that, is all the liabilities are
recorded in the balance sheet or not.
Because sometimes it occurs that some of
the records haven’t been entered in the
liabilities section of the balance sheet.
• As the liabilities should be related to
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Mrs.M.Loheswari
business, so they check that is the
liabilities recorded in the balance sheet is
related to business or not. It is very
important because if the liabilities will not
be related to business and will enter in the
liabilities section of the balance sheet then
it will cause a big problem for the
company.
• While doing verification of liabilities it is
also checked that is that liabilities are fully
authorised or not
• They check that in liabilities the value is
correctly mentioned or not. Because the
value won’t be correctly mentioned then it
will cause loss of the company.
Changes in Basic Accounting
1. Changes in Principles :
The first accounting change, a
change in accounting principle, for
example, a change in when and how
revenue is recognized, is a change from
one generally accepted accounting
principle (GAAP) to another. Companies
can generally choose between two
accounting principles, such as the last in,
first out (LIFO) inventory valuation
method versus the first in, first out (FIFO)
method.
This is a retroactive change that
requires the restatement of previous
financial statements. Previous financials
must be restated to be calculated as if the
new principle were used. The only time
that financial statements are allowed to not
be restated is when every possible effort to
address the change has been made and
such a calculation is deemed impractical.
2. Change in Accounting Estimate :
The second accounting change, a
change in accounting estimate, is a
valuation change. This means a material
change in estimates is noted in the
financial statements and the change is
made going forward. An example would
be a change in the depreciation method.
3. Change in Reporting Entity
The third accounting change is a
change in financial statements, which in
effect, result in a different reporting entity.
This would include a change in reporting
financial statements as consolidated as
opposed to that of individual entities or
changing subsidiaries that make up the
consolidated financial statements. This is
also a retroactive change that requires the
restatement of financial statements.

Unit IV
Company Audit - Audit of Shares,
Qualifications and Disqualifications of
Auditors, Appointment of auditors,
Removal of auditors, Powers and duties of
auditors, Branch audit, Joint audit, Special
audit, Reporting requirements under the
Companies Act, 1956. Audit Report -
Qualifications, Disclaimers, Adverse
opinion, Disclosures, Reports and
certificates.
Audit of Shares
As per section 2(8)
Companies share Act, 2013. “Authorised
capital” or “Nominal capital” means such
capital as is authorised
memorandum of a company to be the
maximum amount of share capital of the
company. Thus, it is the sum stated in the
AUDITING AND ASSURANCE II
Mrs.M.Loheswari
memorandum as the capital of the
company with which it is to be registered
being the maximum amount which it is
authorised to raise by issuing shares, and
upon which it pays the stamp duty. It is
usually fixed at the amount, which, it is
estimated, the company will need,
including the working capital and reserve
capital, if any.
Paid up Share Capital
As per Section 2(50) of the
Companies be Act, 2013, “issued capital”
means that part of authorised capital which
is offered by the company for subscription
and includes the shares allotted for
consideration other than cash.
Qualification
According to Provisions of Section
141(1) of the Companies Act, 2013 “a
person shall be eligible for appointment as
an auditor of a company only if he is a
chartered accountant within the meaning
of Chartered Accountants Act, 1949 and
holds a valid Certificate of Practice.
It has been further provided that the firm
of the
shall also considered to appointed by its
firm name whereof majority of partners
practising in India are qualified for
by the
appointment as auditor of a company.
According to Provisions of Section
141(2) of the Companies Act, 2013, a firm
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Mrs.M.Loheswari
including limited liability partnership who
are chartered accountants shall be
authorised to act as auditor and sign on
behalf of the such limited liability
partnership or firm.
A person shall appointed as an
auditor if he is chartered accountant within
the meaning of Chartered Accountants Act,
1949 and holding valid certificate of
practice and acting in capacity as
a) Individual
b) Partnership Firm
c) Limited Liability partnership
It has been further provided that
only partners who are Chartered
Accountants will be authorised to sign on
behalf of the firm.
Disqualification of Auditor
According to Provisions of
Section 141(3) of the Companies
Act, 2013 , following persons shall
not be eligible as auditor of the
company: ‐
a) A body corporate other than LLP
registered under the LLP Act, 2008
b) An officer or employee of the
company.
c) A person who is partner or who
in the employment, of an officer or
employee of the company.
d) A person who or his relative or
partner
(i) is holding any security/interest
in the company or its subsidiary or of its
holding or associate company or
subsidiary of such holding company. It has
been further provided that an relative may
hold security or interest in the company of
face value not exceeding one lac rupees.
(ii) is indebted to the company or
its subsidiary, or its holding or associate
company or subsidiary of such holding
company, in excess of Rs. 5 lacs rupees
(iii) has given guarantee or provide
any security in connection with the
indebtness of any third person to the
company or its subsidiary, or its holding or
associate company or a subsidiary of such
holding company for value in excess of Rs.
1 lacs.
e) A person or a firm who
(whether directly or indirectly) has
business relationship with the company, or
its subsidiary, or its holding or associate
company or subsidiary of such holding
company or associate company.
Appointment of an Auditor under
Companies Act, 2013
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Mrs.M.Loheswari
The First Auditor of a business other than  Internal Auditor
a government business must be appointed  Subsequent Appointment of
by the Board within 30 days of its Auditor
incorporation, according to section 139 of  Secretarial Auditor
Companies Act, 2013. In the event that the  Cost Auditor
Board fails, an EGM (Extraordinary
Procedure for appointment of First
General Meeting) must be called within 90
Auditor
days to appoint the First Auditor. The 90-
day limit begins on the day of The auditor in this position will serve until

incorporation rather than the expiration of the end of the first Annual General

the 30-day period. Meeting. The company must submit Form

ADT-1 to the Registrar of Companies,
Form ADT needs to file at the time
together with the requisite payments.
of the First Auditor Appointment in a
company. Once the authorization of an If it is a Public Listed Company,

Auditor has been obtained, the Board of then, in that case, the first auditor will be

Directors of the Company can execute a appointed by the auditor general of India

resolution to appoint the Auditor. The and comptroller within 60 days of the

auditor’s appointment must be reported to Company’s incorporation date, and if the

the Registrar of Companies within 15 days Comptroller General of India does not

of her or his appointment. From the appoint such auditor within the said period

conclusion of that meeting until the of time, the Company’s Board of Directors

conclusion of the company’s sixth AGM shall appoint such auditor within the next

(Annual General Meeting), the first auditor thirty days, and if the Board fails to

can serve. The corporation should, appoint such auditor within the next thirty

however, put the question of an auditor’s days, the Company shall be dissolved. The

appointment up for ratification by First Auditor will hold the position until

members at each Annual General Meeting the First Annual General Meeting

(AGM). concludes.

Procedure for appointment of an

auditor other than First Auditor
Different types of Auditor appointed in
a Company The members of the company must
appoint auditors (other than the first
 First Auditor
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auditors) in a general meeting. The auditor
appointed at the general meeting takes
office immediately after the meeting, and
the existing meeting will be considered as
the first auditor meeting for the newly
appointed auditor.
However, if a casual vacancy in the
office of an auditor arises as a result of
registration, the consent of members must
be acquired within three months of the
Board’s recommendation date. The auditor
appointed in the meeting will continue his
or her work till the next Annual General
Meeting. It is required for the Company to
file ADT-1 within 15 days of appointing
the subsequent auditor.
Documents required for appointing
a new auditor for a Company
Following are the forms that need
to be filed by the company at the time of
appointing an auditor for a company
At the time of the First Auditor
Appointment, submit Form MGT-14
together with proof of the resolution.
Form ADT-1 needs to be filed with the
ROC (Registrar of Companies)
In addition to the foregoing forms, the
ROC requires the following information
 The new auditing firm’s name.
 The new auditing firm’s address.
 PAN Number and email address
 The length of time for which the
firm has been hired.
 Information about the resigned
auditing firm.
 The new auditor firm’s
appointment date.
 Form ADT-1, digitally signed
(along with the signature of the
director of the company).
The Auditor is appointed in the
companies under section 139 of the
Companies Act, 2013. The provisions
governing the appointment of an auditor
for a Public Business are more strict than
those governing the appointment of an
auditor for a Private Firm. A listed
business, for example, cannot select an
individual as an auditor for more than five
years in a row. In addition, an audit firm
cannot serve as the auditor of a publicly
listed company for more than two terms,
that is five consecutive years.
Duties of an Auditor
1. Provide an Audit Report
The fundamental duty of a company’s
auditor is to make a report regarding
accounts and financial statements
examined by him and present the same to
the members of the company.
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Mrs.M.Loheswari
Such an opinion of the auditor enhances
the credibility of the financial statements.
This is because it provides reasonable
assurance from the auditor that the
financial statements give a true and fair
view of the company’s state of affairs.
Furthermore, such an auditor’s opinion
assures that the report has been prepared
taking into account the accounting and
auditing standards.
2. Make Proper Enquiry
It is the duty of every auditor to seek
access to books of accounts, vouchers and
other information and explanation from the
company. Furthermore, an auditor can also
inquire information regarding
following matters from the company at any
time:
whether the loans and advances made by
the company on the basis of security have
been properly secured. Furthermore, he
needs to inquire whether the terms and
conditions on the basis of which such
loans and advances have been made are
not unfair.
if the transactions of the company
represented only by book entries have
actually taken place and are not unjust to
the company in any way
whether loans and advances made by the
company are shown as deposits
if the personal expenses (expenses not
associated with the company) are charged
to the revenue amount
whether cash has been received for the
shares that were issued for cash. However,
if no cash has actually been received, the
auditor shall verify that the company’s
position as stated in the books of accounts
is correct, regular and not misleading.
3. Assist in Branch Audit
The accounts of a branch office can be
audited by: a company’s auditor any
individual appointed as the branch auditor
the
as per the act company’s auditor or
accountant or any competent person
appointed as per the laws of the foreign
country in case of a foreign branch
Thus, a branch auditor needs to prepare a
report with regards to the accounts of the
branch examined by him. He needs to
ensure that proper books are maintained
and hence give reasons of qualification in
the report.
After preparing the report, the branch
auditor needs to submit this to the
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Mrs.M.Loheswari
company’s auditor. Furthermore, the
company’s auditor shall examine such a
6. Provide Assistance in Investigation
report in a manner as he deems fit.
Investigation refers to checking of specific
4. Compliance With Auditing Standards
records of a business systematically and
The central government establishes the critically.
auditing standards in consultation with the
ICAI and National Financial Reporting
Authority (NFRA). Such an examination is conducted when a
fault on the part of the company already
exists and the intent of the investigation is
These standards help the auditors to to find out a reason and person involved in
examine the books of accounts effectively such an activity.
and with great accuracy. Thus, every
auditor must comply with the established
auditing standards while examining a Thus, it is the duty of an auditor to assist

company’s books of accounts. the officers undertaking such an

investigation.

5. Reporting of Frauds
7. Adhere Principles of Auditing
A company’s auditor while performing his
duties might encounter fraudulent One of the basic principles that govern an

situations. In such circumstances, the audit is confidentiality. Thus, the auditor

auditor may believe that an offence should maintain confidentiality of

equivalent to a fraud has been committed information acquired while performing his

against the company. duties as an auditor.

And such a fraud has been committed by He should not disclose the client

any of the officers or the company’s information without his prior permission.

employees. Thus, in such situations, it is Furthermore, the auditor must be honest,

the duty of the auditor to report such sincere, impartial and free from biasness.

matters to the central government within Thus, he should exercise a high degree of

60 days of his knowledge.

 AUDITING AND ASSURANCE II
Mrs.M.Loheswari
integrity and objectivity while examining Definition of Audit Report
the company’s books of accounts.
Lancaster has defined a report as “a
report is a statement of collected and
considered facts, so drawn up as to give
8. Provide Negative Opinion
clear and concise information to persons
The auditor needs to give his opinion in who are not already in possession of the
the auditor’s report. Such an opinion can full facts of subject matter of the report.”
be qualified or unqualified.
According to Cambridge Business
English Dictionary, Audit report is defined

An unqualified opinion is the one that as a formal document that states an

concludes that the company’s financial auditor’s judgment of a company’s

statements present its affairs fairly in accounts.

almost all the important aspects.

Furthermore, it states that the company

complies with the necessary statutory
requirements and Generally Accepted
Accounting Principles (GAAP).

A qualified opinion, on the other hand,

concludes that the company has dealt with
most of the issues except for the few ones.
Under this, it is the duty of the auditor to
give even an adverse opinion regarding the
company’s financial statements.

Such an opinion must be given when the

1. Title of the report
auditor disagrees with the management
regarding application, acceptability or The title of audit report should help

adequacy of accounting policies. the reader to identify the report. It should

 AUDITING AND ASSURANCE II
Mrs.M.Loheswari
disclose the name of the client. The title The auditor’s opinion on the books
distinguishes the audit report from other of account and financial statements
reports. examined by him is based on the
information and free from bias. The
2. Name of the Addressee
auditor has to give his opinion as follows:
The addressee normally refers to
· Whether the financial
the person who appoints the auditor. If a
statements are arithmetically correct and
company appoints the auditor, the
correspond to the figures recorded in the
addressee should be shareholders. As per
books of accounts.
law, the complete address of the addressee
is required. Addressee for the statutory · In case of unqualified
audit shall be shareholders and in case of opinion, whether the financial statements
Special Audit, it is Central Government. represent a true and fair view of the state
of affairs and the results of operations.
3. Introductory Paragraph
· In case of qualified
The introductory paragraph should
opinion, if the Balance Sheet and Profit
specify that it is the auditor’s opinion on
and Loss account do not present a true and
financial statements audited by him. The
fair view, the reasons for what and where
period covered by financial statements
is wrong.
should be stated with exact dates.
6. Signature
4. Scope
The signature part should include
This part should include the matter-
the manual signature of the auditor.The
of-fact relating to the manner in which
personal name and signature of the auditor
audit examination was made. The audit
should be given. If the auditor is a firm,
examination should cover company’s
the signature in the personal name and
accounts, Profit and Loss Account,
firm name should be given.
Balance Sheet and Cash Flow Statements.
The examination should be as per the 7. Place of Signature
relevant law. The auditor should not curtail
This should include the location of
or limit any examination task.
the auditor or the auditor firm, which is
5. Opinion ordinarily their city.

8. Date of the Report

 AUDITING AND ASSURANCE II
Mrs.M.Loheswari
The date of completion of the audit operations, due to lack of
work should be mentioned in this section. conformity with the accounting
principles and statutory
Types of Audit Report
requirements,
The audit report may be of the following ii. The information requested by
types: the auditor is not furnished,
iii. Proper books of account are not
maintained as required by law,
iv. Part of audit examination done
by other auditors.

3. Adverse or Negative Report

When there is sufficient basis for

1. Clean or Unqualified Report
Clean or Unqualified report will be given
by the auditor if the auditor is satisfied that
the accounts, Balance Sheet, Profit and
Loss Account and Cash Flow statement do
represent a true and fair view and they are
prepared in conformity with the
accounting principles and statutory
requirements.
2. Qualified Report
In qualified report the auditor
believes that overall financial statements
are not fairly stated. The reasons for giving
Qualified Report are be as follows:
i. The books of accounts, Profit
and Loss Account and the
Balance Sheet do not represent
the true and fair view of the
state of affairs and results of the
the auditor to form an opinion that
the whole accounts and financial
statements, do not present a true
and fair view of the financial
condition and results of operation,
the adverse or negative opinion
will be given. The adverse or
negative report will be given on the
following grounds:
 When the auditor is not satisfied
with the truth and fairness of
financial statements,
 Non conformity with the Generally
Accepted Accounting Principles,
 Mistakes, discrepancies and
material misstatement in the
financial statements,
 Omission of a material disclosure.
4. Disclaimer Report
 AUDITING AND ASSURANCE II
Mrs.M.Loheswari
The auditor may disclaim or refuse
opinion on the accounts, Profit and
Loss Account and the Balance Sheet,
when he does not have sufficient
information to base his opinion. In the
scope and opinion paragraph, the
auditor should give disclaimer
information. This may happen on the
following grounds:

 The auditor has not been able to

obtain sufficient information to
form his opinion,
 The audit examination is not
adequate to form an opinion,
 There are some material un-
determined item in audit
examination.