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AUDIT REPORTS
By:CA. Pankaj Garg
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Elements of Auditor¶s Report
Title
Addressee
Opening or Introductory Paragraph Scope Paragraph
Opinion Paragraph
Date of the Report Place of signature
Auditor¶s signature.
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Opening or Introductory Paragraph
It covers the followings aspects:
Identification of financial statements that
have been audited; Date and period covered by the financial
statements;
Management responsibility for preparation of financial statements;
Auditor¶s responsibility for expression of
opinion.
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Opening paragraph - Illustration
³We have audited the attached Balance
Sheet of M/s______ as at 31st March ____
and also the Profit and Loss account for theyear ended on that date annexed thereto.
These financial statements are the
responsibility of the entity¶s management.
Our responsibility is to express an opinion
on these financial statements based on out
audit´.
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Scope Paragraph
It covers the followings:
Describing the scope of audit by standing that
audit was conducted in accordance with AAS. Requirement of AAS that auditor should
obtain reasonable assurance that the financial
statements are free of material misstatement.
Auditors believing that their audit provides a
reasonable basis for their opinion.
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Scope Paragraph - Illustration
³We conducted out audit in accordance with the AAS
generally accepted in India. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are freeof material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used andsignificant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for
our opinion´.
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Opinion Paragraph
It covers the followings aspects:
Auditor¶s opinion about true and fair
view of financial statements. Reporting on various matters required
by law.
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Opinion Paragraph ± Illustration
In our opinion and to the best of our information
and according to the explanations given to us,
the financial statement gives a true and fair
view in conformity with the accounting principles generally accepted in India.
In the case of Balance Sheet, of the state of
affairs of the M/s____ as at 31st
March _____. In the case of Profit and Loss Account of the
profit/loss for the year ended on that date.
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Types of Audit Reports
Types of Reports
Unqualified Modified Disclaimer of Opinion
Do not affect Opinion Affect Opinion
Qualified Adverse
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Unqualified Reports
An opinion is said to be unqualified
when the auditor concludes that the
financial statements give a true andfair view in accordance with the
financial reporting framework used for
the preparation and presentation of thefinancial statements.
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Unqualified Report
An Unqualified Report indicates the followings:
Financial Statements have been prepared using
the generally accepted accounting principles.
Financial Statements comply with relevant
statutory requirements and regulations.
All material matters have been adequately
disclosed.
Effect of any change in the accounting policies
have been properly determined and disclosed in
the financial statements.
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Modified Reports
An Report other than unqualified is said to be
MODIFIED. As per AAS ± 28, an auditor¶s
report is considered to be modified when it
includes:
(a) Matters that do not affect the auditor¶s
opinion ± with emphasis of matter
(b)Matters that do affect the auditor¶s opinion
± Qualified Reports and adverse Reports
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Qualified Audit Reports
A qualified audit report is one where an auditor gives
an opinion on the truth and fairness of financial
statements, subject to certain reservations.
A qualified opinion should be expressed when theauditor concludes that ±
(a) An unqualified opinion cannot be expressed; or
(b) The effect of any disagreement with management
is not so material as to require an adverse
opinion;
(c) The limitation on scope is not so material as to
require a disclaimer of opinion.
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Circumstances which demand qualified report
Auditor is unable to obtain necessary information &explanations.
Proper books of account have not been kept by the
company. Balance Sheet and Profit and Loss Account are not in
agreement with the books of account and returns.
Profit and Loss account & the balance sheet do not
comply with the Accounting Standards. If there is contravention of the provisions of
Companies Act having a bearing on the accounts andtransactions of the company.
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Disclaimer of Opinion
The auditor while performing his work may
come across several instances where he fails to
obtain sufficient information to warrant an
expression of opinion, and thus, is unable to
form an opinion, he issues a disclaimer of
opinion. Accordingly, the auditor may state that
he is unable to express an opinion because hehas not been able to obtain sufficient and
appropriate audit evidence to form an opinion´.
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Applicability of CARO 2004
CARO, 2004 is applicable to all types of companies
including a foreign company, but shall not apply to:
1. A banking company;
2. An insurance company;
3. Sec. 25 Company; and
4. A private limited company:
- paid up capital & reserves does not exceeds Rs. 50 lakh;
- outstanding loan does not exceeds Rs. 25 Lakhs,
- turnover does not exceed Rs. 5 crore.
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CARO 2004 ± Fixed Assets
whether the company is maintaining proper records
showing full particulars, including quantitative
details and situation of fixed assets;
whether these fixed assets have been physicallyverified 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 account; and
if a substantial part of fixed assets have been
disposed off during the year, whether it has affected
the going concern.
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CARO 2004 ± Inventories
whether physical verification of inventory has been
conducted at reasonable intervals by the management;
are the procedures of physical verification of inventory
followed by the management reasonable and adequate inrelation to the size of the company and the nature of its
business. If not, the inadequacies in such procedures
should be reported; and
whether the company is maintaining proper records of inventory and whether any material discrepancies were
noticed on physical verification and if so, whether the
same have been properly dealt with in the books of
account.
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CARO 2004 ± Loan and Advances
has the company granted any loans, secured or unsecured to companies, firms or other partiescovered in the register maintained u/s 301 of the Act.If so, give the number of parties & amount involved
in the transactions; whether the rate of interest & other terms of loans
given by the company, are prima facie prejudicial tothe interest of the company;
whether receipt of the principal amount & interestare regular;
if overdue amount is more than Rs. 1,00,000,whether reasonable steps have been taken by thecompany for recovery of the principal & interest;
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CARO 2004 ± Loan and Advances
has the company taken any loans, secured or
unsecured from companies, firms or other parties
covered in the register maintained u/s 301 of the Act.
If so, give the number of parties & amount involvedin the transactions;
whether the rate of interest and other terms of loans
taken by the company, are prima facie prejudicial to
the interest of the company; and
whether payment of the principal amount & interest
are also regular.´
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CARO 2004 ± Internal Control
Is there an adequate internal control system
commensurate with the size of the
company and the nature of its business, forthe purchase of inventory and fixed
assets and for the sale of goods and
services?W
hether there is a continuingfailure to correct major weaknesses in
internal control system.
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CARO 2004 ± Contracts in Which Directors Interested
whether the particulars of contracts or
arrangements referred to in section 301 of the
Act have been entered in the register required
to be maintained under that section; and
whether transactions made in pursuance of
such contracts or arrangements have been
made at prices which are reasonable havingregard to the prevailing market prices at the
relevant time;´
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CARO 2004 ± Internal Audit
In the case of listed companies and/or other companies having a paid up capital andreserves exceeding Rs. 50 lakhs as at the
commencement of the financial year concerned, or having an average annualturnover exceeding five crore rupees for a period of three consecutive financial years
immediately preceding the financial year concerned, whether the company has aninternal audit system commensurate with itssize and nature of its business.
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CARO 2004 ± Cost Records
Where maintenance of cost records has
been prescribed by the Central
Government under clause (d) of sub-section (1) of section 209 of the Act,
whether such accounts and records have
been made and maintained.
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CARO 2004 ± Statutory Dues
is the company regular in depositing undisputed
statutory dues including PF, Investor Education and
Protection Fund, ESI, Income-tax, Sales-tax, Wealth tax,
Service tax, Custom Duty, Excise Duty, cess and anyother statutory dues with the appropriate authorities and
if not, the extent of the arrears of outstanding statutory
dues as at the last day of the financial year concerned for
a period of more than 6 months from the date they
became payable.
in case taxes have not been deposited on account of any
dispute, then the amounts involved and the forum where
dispute is pending shall be mentioned.
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CARO 2004 ± Others
whether the company has given any guaranteefor loans taken by others from bank or financial institutions, the terms and conditions
whereof are prejudicial to the interest of thecompany;
whether term loans were applied for the purpose for which the loans were obtained;
whether the funds raised on short-term basishave been used for long term investment; If yes, the nature and amount is to be indicated;
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CARO 2004 ± Others
whether security or charge has been created in
respect of debentures issued?
whether the management has disclosed on the
end use of money raised by public issues and
the same has been verified;
whether any fraud on or by the company has
been noticed or reported during the year; if yes, the nature and the amount involved is to
be indicated.
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Nov. 02 (4 + 4 Marks)
Q. No. 1: State your views on thefollowing: The Auditor does not agreewith affirmations made in the
financial statements.
Q. No. 2: State your views on the
following: The auditor fails to obtainsufficient information to form anoverall opinion on the matterscontained in the financial statements.
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May & Nov. 03 (3 Marks)
Q. No. 3: Comment: No cost accountingrecords are maintained though thecompany is required to maintain the
same.
Q. No. 4: Comment on the following: ABC
Ltd. has not deposited provident fundcontributions of Rs.20 lakhs to theauthorities, but accounted in the books.
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Nov. 05 (4 Marks)]
Q. No. 5: As an auditor, comment on the following: SK Ltd. has fully computerised its accountingoperations. The stock records are maintained up todate with timely entries passed for all receipts and
issues. The company has hired a professionalsecurity agency, which monitors and implements aclose vigilance over the operations of thecompany. As such, the company had dispensed
with the practice of taking stock of their inventories at the year end as in their opinion theexercise is redundant, time consuming andintrusion to normal functioning of the operations.
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May 06 (5 Marks)
Q. No. 6: As an auditor, comment on thefollowing situations/statements: XLtd., to whom Companies (Auditor¶s
Report) Order, 2003 is applicable, hasissued 9% Debenture of Rs. 5 crores,redeemable after 5 years and used the proceeds of issue for payment of
Sundry Creditors and other CurrentLiabilities of Rs. 2.80 crores.
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Nov. 06 (4 Marks)
Q. No. 7: As an Auditor, comment on the following
situations/statements: JKT Ltd. having Rs. 40
lacs paid up capital, Rs. 9.50 lacs reserves and
turnover of last three consecutive financialyears, immediately preceding the financial year
under audit, being Rs. 4.90 crores, Rs. 4.50
crores and Rs. 6 crores, but does not have any
internal audit system. In view of themanagement, internal audit system is not
mandatory.
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