AUDIT REPORT

INTRO AND BEGIN FROM BOOK (CMA INTER)

REQUIREMENTS AS PER COMPANY LAW (BARE ACT)
CONTENT OF AUDIT REPORT AS PER SAs (SA – 700)

1. Title

 What is this?
The audit report must have a proper title to distinguish it from other reports.

 Example:
"Independent Auditor’s Report."

2. Addressee

 Who is the report addressed to?

It’s addressed based on the terms of engagement, generally to the appointing authority.

 Example:
In the case of a public limited company, it’s addressed to the members (shareholders).

3. Auditor’s Opinion

 What should this section include?

o The name of the client.

o A mention that the financial statements were audited.

o Titles of the financial statements audited (like balance sheet, income statement, etc.).

o Reference to the accounting policies and other explanatory information.

o The period covered by the financial statements.

4. Basis for Opinion

 Why did the auditor form this opinion?

This section explains why the auditor reached their conclusion.

Key Points:

1. Standards: State that the audit was done according to applicable Standards on Auditing
(SAs).

2. Ethics: The auditor must declare their independence from the entity and confirm compliance
with ethical standards.

3. Su iciency: Mention whether the audit evidence obtained is enough to support the opinion.
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5. Going Concern Assumption

 When does this apply?

If applicable, the auditor reports in line with SA 570 (Revised) about whether the company can
continue as a going concern (i.e., it’s not expected to go out of business soon).

6. Key Audit Matters (KAM)

 What are KAMs?

These are issues that the auditor found most significant during the audit of the financial statements.

Example:

o Valuation of goodwill.

o Valuation of long-term assets or financial instruments.

Important:
This section is mandatory for audits of listed entities, but it can also be included for other companies based on
law or the auditor’s judgment.

7. Responsibilities for the Financial Statements

 Who is responsible for preparing the financial statements?

Management is responsible for:

1. Preparing the financial statements according to the applicable framework.

2. Ensuring proper internal controls to prevent misstatements due to fraud or error.

3. Assessing whether the company can continue as a going concern.

8. Auditor’s Responsibilities for the Audit

 What is the auditor responsible for?

1. Reasonable Assurance: Ensuring that the financial statements are free from material
misstatements due to fraud or error.

2. Detection of Errors: While the audit provides high assurance, it does not guarantee that every
error will be found.

3. Risk Assessment: Identifying and assessing the risks of material misstatements.

4. Internal Controls: Understanding the company’s internal control systems.

5. Going Concern: Evaluating management's use of the going concern assumption and
commenting if any uncertainties exist.

9. Other Reporting Responsibilities

 What else might the auditor report?

If there are additional responsibilities related to legal or regulatory requirements, they are mentioned
under “Report on Other Legal and Regulatory Requirements.”
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10. Signature of the Auditor

 How should the report be signed?

1. The auditor (engagement partner) signs it in their personal name.

2. If a firm conducted the audit, it’s signed in both the auditor's name and the firm’s name.

3. The membership number of the auditor and the registration number of the firm should also be
included.

11. Place of Signature

 What should be mentioned here?

The location where the report was signed (usually the city where the audit was completed).

12. Date of the Auditor’s Report

 Why is this important?

The date shows when the auditor completed their work and expresses their opinion on the financial
statements.

COMPANIES (AUDITOR’S REPORT) ORDER (CARO) 2020 – KEY NOTES

A. Introduction

 Issued by: Ministry of Corporate A airs, Government of India.

 Notification Date: 25th February 2020.

 E ective Date: For audits starting on or after 1st April 2021 (financial year 2020-21 onwards).

 Objective: CARO 2020 requires the auditor to include specified matters in their report as per Section
143 of the Companies Act, 2013.

B. Applicable Companies

CARO 2020 applies to most companies but excludes:

1. Banking Companies (as per Banking Regulation Act, 1949).

2. Insurance Companies (as per Insurance Act, 1938).

3. Companies licensed under Section 8 of the Companies Act (non-profit).

4. One Person Company (OPC) and Small Companies (paid-up capital/reserves ≤ ₹1 crore, borrowings ≤
₹1 crore, revenue ≤ ₹10 crore).

5. Certain Private Companies meeting the threshold criteria (capital and revenue limits).
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C. Key Matters to be Reported (Selected Clauses)

1. Non-current Assets [Clause 3(i)]:

o Proper records of Property, Plant, and Equipment (PPE) and intangible assets.

o Physical verification and management handling of discrepancies.

o Status of title deeds, revaluation of PPE, and proceedings under the Benami Transactions Act.

2. Inventory [Clause 3(ii)]:

o Physical verification intervals and appropriateness.

o Reporting discrepancies (10% or more) and alignment with books of account.

o Reporting on working capital limits exceeding ₹5 crore.

3. Investments, Guarantees, Loans [Clause 3(iii)]:

o Details of loans, advances, guarantees, and security provided.

o Terms and conditions, overdue amounts, and renewed loans.

4. Loans to Directors and Investments [Clause 3(iv)]:

o Compliance with Sections 185 & 186 of the Companies Act.

5. Deposits [Clause 3(v)]:

o Compliance with RBI directives and provisions under Sections 73-76 of the Companies Act.

6. Statutory Dues [Clause 3(vii)]:

o Regularity in depositing dues (PF, ESI, income tax, etc.) and status of disputes.

7. Fraud Reporting [Clause 3(xi)]:

o Reporting fraud by or on the company.

o Consideration of whistleblower complaints.

8. Nidhi Companies [Clause 3(xii)]:

o Compliance with Nidhi Rules regarding deposits and defaults.

9. CSR Expenditure [Clause 3(xx)]:

o Reporting unspent CSR funds for ongoing and other projects.

10. Reporting of Defaults [Clause 3(ix)]:

o Defaults in repayment of loans, whether declared a wilful defaulter, and diversion of loan funds.

11. Related Party Transactions [Clause 3(xiii)]:

o Compliance with Sections 177 and 188 for related party transactions.

D. Qualified/Unfavourable Answers [Clause 4]

If the auditor gives a qualified or unfavourable answer to any point:

 Basis for such qualified answer must be provided.

 If the auditor cannot express an opinion, reasons for this must also be stated.
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Auditor’s Opinion in Audit Report
The opinions expressed in audit reports by statutory auditors can be broadly divided into two categories:

1. Unmodified Opinion

2. Modified Opinion

A. Unmodified Opinion (Clean or Unqualified Report)

An auditor expresses an unmodified opinion when they believe the financial statements provide a true and fair
view of the company’s financial position. This report is issued when:

 The financial statements are prepared following Generally Accepted Accounting Principles (GAAP).

 The statements meet statutory requirements and regulations.

 All material information has been disclosed properly.

 Changes in accounting policies or methods are clearly disclosed.

In simple terms, a clean report means everything looks good, and the financials are presented correctly
according to the rules.

B. Modified Opinion

A modified opinion is issued when the auditor identifies certain issues with the financial statements. It occurs
in two cases:

1. Material Misstatements – The auditor finds errors in the financial statements.

2. Lack of Su icient Evidence – The auditor cannot obtain enough evidence to confirm the accuracy of
the financials.

Types of Modified Opinions:

1. Qualified Opinion

o Issued when the financial statements have misstatements that are material but not pervasive
(i.e., they a ect certain parts but aren’t widespread).

o Example: The company hasn’t valued its inventory properly, but this doesn't impact the entire
financial statement.

2. Adverse Opinion

o Given when the financial misstatements are both material and pervasive (they a ect the entire
financial picture).

o Example: The company continues to operate as if it will survive, but it plans to shut down soon
(violating the “going concern” assumption).

3. Disclaimer of Opinion

o Used when the auditor cannot obtain su icient evidence to form an opinion. This happens in
situations where uncertainties exist that make it impossible for the auditor to conclude the
financial status.

o Example: The auditor wasn’t allowed to verify key financial data, like physical inventory or bank
balances.
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DECIDING ON APPROPRIATE MODIFIED OPINION
When an auditor decides to modify their opinion on the financial statements, it is based on SA 705 (Standards
on Auditing). There are two key factors that help the auditor decide which type of modified opinion to issue:

1. Nature of the Issue: What is wrong? Are the financial statements misstated, or is there a lack of audit
evidence?

2. Pervasiveness: How serious is the issue? Is it a ecting just a part of the financial statement (not
pervasive), or is it a ecting the entire statement (pervasive)?

Factors Leading to Modification

There are two types of issues that could lead to a modification in the auditor’s opinion:

 Material Misstatement: There are errors or misstatements in the financial reports.

 Inability to Obtain Audit Evidence: The auditor cannot gather enough evidence to verify the financial
information.

Table Breakdown

Issue Material but Not Pervasive Material and Pervasive

Financial statements are misstated Qualified Opinion Adverse Opinion

Inability to obtain su icient audit evidence Qualified Opinion Disclaimer of Opinion

Material but Not Pervasive

 Qualified Opinion: If the problem (misstatement or lack of evidence) a ects only certain parts of the
financials and is not widespread, the auditor issues a Qualified Opinion. It means the financial
statements are mostly fine, but there are some issues that need attention.

Material and Pervasive

 Adverse Opinion: If the financial statements have significant errors that a ect the entire report, the
auditor will issue an Adverse Opinion, indicating the financials are not reliable.

 Disclaimer of Opinion: If the auditor cannot get enough evidence and believes this could have a
significant impact on the entire financial report, they will issue a Disclaimer of Opinion. This means
the auditor cannot provide any opinion on the financials due to insu icient information.