Chapter 8: Audit Report – Summary
1. Introduction to Audit Report
• The audit process culminates in the formation of the auditor’s opinion and the
expression of this opinion through the audit report.
• The audit report is the final outcome of an audit and is relied upon by users of
financial statements to assess the auditor’s conclusions.
• The auditor’s opinion is based on audit evidence obtained through various audit
procedures.
Example: A company’s financial statements show a net profit of ₹50 crores. The
auditor checks sales invoices, expense records, and tax filings to verify whether this
amount is accurate.
2. Forming an Opinion and Reporting on Financial
Statements (SA 700)
• SA 700 (Revised) deals with:
o Forming an opinion on financial statements.
o Structure and content of the auditor’s report.
2.1 Objectives of the Auditor under SA 700
1. Form an opinion on the financial statements based on audit evidence.
2. Express the opinion clearly in a written audit report.
Example: An auditor examines a company’s financial records and concludes that they
fairly represent the business’s financial health. The auditor then issues an unmodified
opinion in the audit report.
3. Auditor’s Evaluations Before Forming an Opinion
• The auditor must check if:
✔ The financial statements comply with applicable financial reporting standards.
✔ The accounting policies are appropriate and consistently applied.
✔ The financial statements are free from material misstatements.
3.1 Qualitative Aspects of Accounting Practices
• The auditor must assess possible biases in management’s judgment.
• Examples of management bias:
o Selective correction of errors (only when they increase profits).
o Aggressive revenue recognition policies.
Example: A company delays recording expenses to artificially increase profits. The
auditor must consider this in their evaluation.
4. Forms of Audit Opinion
• The auditor can issue:
o Unmodified Opinion – When financial statements are fair and free from
material misstatements.
o Modified Opinion – When issues require qualification, adverse opinion, or
disclaimer.
4.1 Unmodified Opinion
• Used when financial statements comply with applicable standards.
• The opinion should state:
o The financial statements present a true and fair view.
o Compliance with accounting standards and regulations.
Example: A company follows Indian Accounting Standards (Ind AS) correctly, and
there are no misstatements. The auditor issues an unmodified opinion.
5. Modified Opinions (SA 705)
• A modified opinion is issued if financial statements have material misstatements or
if the auditor cannot obtain sufficient evidence.
• Types of modified opinions:
5.1 Qualified Opinion
• Used when misstatements are material but not pervasive.
• The auditor includes a "Basis for Qualified Opinion" section explaining the issue.
Example: A company does not disclose contingent liabilities properly, but this does
not affect all aspects of the financial statements. The auditor issues a qualified opinion.
5.2 Adverse Opinion
• Used when financial statements are materially misstated and misleading.
Example: A company inflates revenue by 50%, which significantly misrepresents its
financial position. The auditor issues an adverse opinion.
5.3 Disclaimer of Opinion
• Used when the auditor cannot obtain sufficient audit evidence.
• This means the auditor does not express an opinion on the financial statements.
Example: A company refuses to provide access to critical financial records,
preventing the auditor from forming a conclusion. A disclaimer of opinion is issued.
6. Key Audit Matters (SA 701)
• Key Audit Matters (KAM) are issues that:
✔ Are of most significance in the audit.
✔ Required extensive audit attention.
• KAM is mandatory for listed companies.
Example: A company is involved in litigation that may impact financial health. The
auditor highlights this as a Key Audit Matter in the audit report.
7. Emphasis of Matter and Other Matter Paragraphs (SA
706)
• Used to draw attention to specific issues without modifying the opinion.
7.1 Emphasis of Matter (EOM)
• Used when an issue is appropriately disclosed in financial statements but is
important for users to note.
Example: A company changes its depreciation policy, significantly impacting profits.
The auditor includes an Emphasis of Matter paragraph.
7.2 Other Matter Paragraph
• Used to highlight information not disclosed in the financial statements but
relevant to users.
Example: A company’s audit for the previous year was conducted by a different
auditor. The current auditor includes this in an Other Matter paragraph.
8. Comparative Information (SA 710)
• Financial statements often include comparative figures from previous years.
• The auditor must verify that comparative figures are:
✔ Consistent with prior audits.
✔ Adjusted for any restatements.
Example: If a company reclassifies expenses in the current year, the auditor ensures
the previous year’s figures are adjusted accordingly.
9. Reporting on Work of Another Auditor (SA 600)
• If part of the financial statements is audited by another auditor, the principal
auditor must evaluate their work.
• The auditor may refer to another auditor’s work in the report or take full
responsibility.
Example: A company has multiple branches, and a different auditor audits each
branch. The principal auditor reviews branch audit reports before forming an opinion.
10. Joint Audits (SA 299)
• In some cases, multiple auditors conduct an audit jointly.
• The auditors divide responsibilities but issue a single audit report.
Example: A large PSU company appoints two firms as joint auditors. They divide
areas of audit and collaborate on the final report.
11. Companies (Auditor’s Report) Order, 2020 (CARO
2020)
• CARO requires auditors to report on specific company matters, including:
✔ Loan defaults.
✔ Fixed asset records.
✔ Fraud detection.
✔ Internal control effectiveness.
Example: If a company defaults on bank loans, the auditor must report this under
CARO 2020.
12. Auditor’s Signature and Reporting Requirements
• The audit report must include:
✔ Auditor’s name and signature.
✔ Place and date of the report.
✔ UDIN (Unique Document Identification Number).
Example: A statutory auditor issues an audit report on April 10, 2024, signs it, and
includes the UDIN for validation.
Key Takeaways
The audit report is the final outcome of an audit and is relied upon by stakeholders.
Unmodified opinion is issued when financial statements are free from material
misstatements.
Modified opinions include qualified, adverse, and disclaimer of opinion.
Key Audit Matters (KAM) highlight significant issues in listed company audits.
CARO 2020 requires auditors to report on key regulatory matters.
Audit reports must follow SA guidelines, including signature and UDIN
requirements.
