6

AUDIT REPORTS

LEARNING OUTCOMES

After studying this chapter, you will be able to:

 Understand the meaning and Different types of Audit Reports as per
Standards of Auditing.
 Identify the different aspects of Reporting as per Standards of Auditing.
 Determine and apply knowledge of Reporting for further study and
Professional Practice.

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 6.2 ADVANCED AUDITING AND PROFESSIONAL ETHICS

CHAPTER OVERVIEW

Audit Report

Types of Audit Elements of Audit Report

Meaning
Report Audit Reports formats

1. INTRODUCTION
Assuming you are an auditor and have
concluded the audit field work, your next
step will be issuance of the audit report.
An audit report is very important medium
of communication i.e. auditor’s expert
views on the financial statements and it
has a significant bearing on the credibility
of such statements. By expressing views
in the report, the auditor takes upon
himself a great responsibility because a
large number of stakeholders are likely to
place reliance on the financial
statements. Therefore, the auditor is
necessarily required to be careful,
vigilant, and objective in the matter of
preparation of his report. The auditor
should endeavor to keep his report as
much simpler as possible but off course
complying with the applicable reporting
requirements and as much as the
circumstances may permit.

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 AUDIT REPORTS 6.3

2. THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS

The SA 700 series is purely dedicated to the auditor report to be issued by the auditor. There are following
SAs which you need to be aware of:
Particulars Head Purpose Effective Date
SA-700 Forming an • Forming opinion on the financial 1st April 2017
(Revised) Opinion and statements.
Reporting on • Form and content of the audit
Financial report.
Statements
SA-701 (newly Communicating • To enhance the communicative 1st April 2017
introduced) Key Audit value of the auditor’s report by
Matters in the providing greater transparency
Independent about the audit that was
Auditor’s Report performed.
• To assist the user in
understanding those matters
that, in the auditor’s professional
judgment, were of most
significance in the audit of the
financial statements of the
current period.
SA-705 Modifications to • To issue an appropriate audit 1st April 2017
(Revised) the Opinion in report when the auditor
the Independent considers the modification in an
Auditor’s Report audit report is necessary.
• To deal with the revised form and
content when the modification of
the opinion take place.
SA-706 Emphasis of To draw user’s attention to a 1st April 2017
(Revised) Matter matter or matters:-
Paragraphs and • Presented or disclosed in the
Other Matter financial statements and which is
Paragraphs in fundamental for the
the Independent understanding of the user, or
Auditor’s Report
• Not presented or disclosed in
• the financial statement and
which is relevant for the
understanding of the user.

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 6.4 ADVANCED AUDITING AND PROFESSIONAL ETHICS

3. SA-700, “FORMING AN OPINION AND REPORTING ON

THE FINANCIAL STATEMENTS”
It deals with the auditor’s responsibility to form an opinion on the financial statements. It also deals
with the form and content of the auditor’s report issued as a result of an audit of financial statements.

Objective: As per SA 700 the objectives of the auditor are:

(a) To form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report.

3.1 Purpose: The requirements of this SA are aimed at addressing an appropriate balance between
the need for consistency and comparability in auditor reporting globally and the need to increase the
value of auditor reporting by making the information provided in the auditor’s report more relevant
to users. This SA promotes consistency in the auditor’s report, but recognizes the need for flexibility
to accommodate particular circumstances of individual jurisdictions. Consistency in the auditor’s
report, when the audit has been conducted in accordance with SAs, promotes credibility in the global
marketplace by making more readily identifiable those audits that have been conducted in
accordance with globally recognized standards. It also helps to promote the user’s understanding
and to identify unusual circumstances when they occur.

Image: Understanding Audit report, Forms and contents of Audit Report ∗

∗
Source : accountlearning.com

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 AUDIT REPORTS 6.5

3.2 Basic Elements of the Auditor’s Report: As per SA 700 “Forming an opinion and reporting
on financial statements”, the auditor’s report includes the following basic elements, which ordinarily
includes in case of Auditors’ Report for Audits Conducted in Accordance with Standards on Auditing:

Title

Addressee

Opinion

Basis of the opinion

Management’s Responsibility for Financial Statement

Auditor’s Responsibility

Other Reporting Responsibilities

Location of the description of the auditor’s responsibilities

Signature of the Auditor

Place of Signature

Date of Audit Report

1. Title: The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor.
“Independent Auditor’s Report,” distinguishes the independent auditor’s report from
reports issued by others.
2. Addressee: The auditor’s report shall be addressed as required by the circumstances of the
engagement.
The report could be addressed to the Members of the Company in case of general
purpose (statutory) financial statements and to the Board of Directors in case of
special purpose financial statements.
3. Auditor’s Opinion: The first section of the auditor’s report shall include the auditor’s opinion,
and shall have the heading “Opinion.”
The Opinion section of the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;

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 6.6 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the financial
statements.

When expressing an unmodified opinion on financial statements prepared in accordance with

a fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or
regulation, use one of the following phrases, which are regarded as being equivalent:
(i) In our opinion, the accompanying financial statements present fairly, in all material
respects, […] in accordance with [the applicable financial reporting framework]; or
(ii) In our opinion, the accompanying financial statements give a true and fair view of
[…] in accordance with [the applicable financial reporting framework].
When expressing an unmodified opinion on financial statements prepared in accordance with
a compliance framework, the auditor’s opinion shall be that the accompanying financial
statements are prepared, in all material respects, in accordance with [the applicable financial
reporting framework].
If the reference to the applicable financial reporting framework in the auditor’s opinion is not to
Accounting Standards, the auditor’s opinion shall identify the origin of such other framework.
4. Basis for Opinion: The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements. The statement shall refer to the
Code of Ethics issued by ICAI
(d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570.
6. Key Audit Matters: For audits of complete sets of general purpose financial statements of listed
entities, the auditor shall communicate key audit matters in the auditor’s report in accordance
with SA 701.
When the auditor is otherwise required by law or regulation or decides to communicate key
audit matters in the auditor’s report, the auditor shall do so in accordance with SA 701.

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7. Responsibilities for the Financial Statements: The auditor’s report shall include a section with
a heading “Responsibilities of Management for the Financial Statements.” The auditor’s report
shall use the term that is appropriate in the context of the legal framework applicable to the entity
and need not refer specifically to “management”. In some entities, the appropriate reference may
be to those charged with governance.

This section of the auditor’s report shall describe management’s responsibility

for:

(b) Assessing the entity’s ability to continue as a

(a) Preparing the financial statements in going concern and whether the use of the going
accordance with the applicable financial concern basis of accounting is appropriate as
reporting framework, and for such internal well as disclosing, if applicable, matters relating
control as management determines is necessary to going concern. The explanation of
to enable the preparation of financial statements management’s responsibility for this assessment
that are free from material misstatement, shall include a description of when the use of the
whether due to fraud or error; and going concern basis of accounting is
appropriate.

This section of the auditor’s report shall also identify those responsible for the oversight of the
financial reporting process, when those responsible for such oversight are different from those
who fulfill the responsibilities described in next paragraph. In this case, the heading of this
section shall also refer to “Those Charged with Governance” or such term that is appropriate
in the context of the legal framework applicable to entity.
When the financial statements are prepared in accordance with a fair presentation framework,
the description of responsibilities for the financial statements in the auditor’s report shall refer
to “the preparation and fair presentation of these financial statements” or “the preparation of
financial statements that give a true and fair view,” as appropriate in the circumstances.
8. Auditor’s Responsibilities for the Audit of the Financial Statements: The auditors report
shall include a section with the heading “Auditor’s Responsibilities for the Audit of the Financial
Statements.”
(I) This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with SAs will always detect
a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate,

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 6.8 ADVANCED AUDITING AND PROFESSIONAL ETHICS

they could reasonably be expected to influence the economic decisions of

users taken on the basis of these financial statements; or
(ii) Provide a definition or description of materiality in accordance with the
applicable financial reporting framework.

(II) The Auditor’s Responsibilities for the Audit of the Financial Statements section of
the auditor’s report shall further:
To exercises professional judgment and maintains
professional skepticism throughout the audit as per SAs;
Auditor’s Responsibilities in Audit of FS

To identify and assess the risks of

material misstatement of the FS

To obtain an understanding of accounting policies

internal control relevant for audit to used
To describe an audit design audit procedures
by stating that the
auditor’s reasonableness of
responsibilities are: To evaluate the appropriateness of: accounting estimates

related disclosures
To conclude on the appropriateness of made by
To describe the management’s use of the going concern
auditor’s management.
basis
responsibilities in a
group audit
engagement as per to evaluate the overall presentation, structure
SA 600. and content of the financial statements

(a) State that, as part of an audit in accordance with SAs, the auditor exercises
professional judgment and maintains professional skepticism throughout the audit;
and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error; to design and perform
audit procedures responsive to those risks; and to obtain audit evidence that
is sufficient and appropriate to provide a basis for the auditor’s opinion. The
risk of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
(ii) To obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. In circumstances when the auditor also has a

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responsibility to express an opinion on the effectiveness of internal control in

conjunction with the audit of the financial statements, the auditor shall omit
the phrase that the auditor’s consideration of internal control is not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal
control.
(iii) To evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
(iv) To conclude on the appropriateness of management’s use of the going
concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern. If
the auditor concludes that a material uncertainty exists, the auditor is
required to draw attention in the auditor’s report to the related disclosures in
the financial statements or, if such disclosures are inadequate, to modify the
opinion. The auditor’s conclusions are based on the audit evidence obtained
up to the date of the auditor’s report. However, future events or conditions
may cause an entity to cease to continue as a going concern.
(v) When the financial statements are prepared in accordance with a fair
presentation framework, to evaluate the overall presentation, structure
and content of the financial statements, including the disclosures, and
whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.

(c) When SA 600, “Using the Work of Another Auditor”, applies, further describe the
auditor’s responsibilities in a group audit engagement by stating, the division of
responsibility for the financial information of the entity by indicating the extent to
which the financial information of components is audited by the other auditors have
been included in the financial information of the entity, e.g., the number of
divisions/branches/subsidiaries or other components audited by other auditors
(III) The Auditor’s Responsibilities for the Audit of the Financial Statements section of
the auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance
regarding, among other matters:
the planned scope and timing of the audit and
significant audit findings,
including any significant deficiencies in internal control that the auditor identifies
during the audit;

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 6.10 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(b) State that the auditor provides those charged with governance with a
statement that the auditor has:
complied with relevant ethical requirements regarding independence and
communicate with them all relationships and
other matters that may reasonably be thought to bear on the auditor’s
independence, and where applicable, related safeguards; and
(c) For audits of financial statements of all such entities for which key audit matters
are communicated in accordance with SA 701, state that, from the matters
communicated with those charged with governance, the auditor determines those
matters that were of most significance in the audit of the financial statements of
the current period and are therefore the key audit matters.
In accordance with the requirements of SA 701, the auditor describes these matters in the
auditor’s report unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, the auditor determines that a matter should not be
communicated in the auditor’s report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such
communication.

9. Location of the description of the auditor’s responsibilities for the audit of the financial
statements: The description of the auditor’s responsibilities for the audit of the financial
statements required by this SA shall be included:

(c) By a specific reference

within the auditor’s report to
(b) Within an appendix to
the location of such a
the auditor’s report, in
description on a website of
(a) Within the body of the which case the auditor’s
an appropriate authority,
auditor’s report; report shall include a
where law, regulation or the
reference to the location of
auditing standards
the appendix; or
expressly permit the auditor
to do so.

When the auditor refers to a description of the auditor’s responsibilities on a website of an

appropriate authority, the auditor shall determine that such description addresses, and is not
inconsistent with, the requirements of this SA.
10. Other Reporting Responsibilities:
(a) If the auditor addresses other reporting responsibilities in the auditor’s report on the
financial statements that are in addition to the auditor’s responsibilities under the SAs,

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these other reporting responsibilities shall be addressed in a separate section in the

auditor’s report with a heading titled “Report on Other Legal and Regulatory
Requirements” or otherwise as appropriate to the content of the section, unless these
other reporting responsibilities address the same topics as those presented under the
reporting responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report elements
required by the SAs.
(b) If other reporting responsibilities are presented in the same section as the related report
elements required by the SAs, the auditor’s report shall clearly differentiate the other
reporting responsibilities from the reporting that is required by the SAs.
(c) If the auditor’s report contains a separate section that addresses other reporting
responsibilities, the requirements of this SA shall be included under a section with a
heading “Report on the Audit of the Financial Statements.” The “Report on Other Legal
and Regulatory Requirements” shall follow the “Report on the Audit of the Financial
Statements.”
11. Signature of the Auditor: The auditor’s report shall be signed. The report is signed by the
auditor (i.e. the engagement partner) in his personal name. Where the firm is appointed as the
auditor, the report is signed in the personal name of the auditor and in the name of the audit
firm. The partner/proprietor signing the audit report also needs to mention the membership
number assigned by the Institute of Chartered Accountants of India. They also include the
registration number of the firm, wherever applicable, as allotted by ICAI, in the audit reports
signed by them.
The report is to be signed by the maker of the report. Normally, a chartered accountant in
practice signs the report in the name he is registered as a practitioner. If he is an individual, it
may be his individual name or the firm name of which he is the sole proprietor. For those
members in practise as a partnership firm, it is usual for them to sign in the firm name. Under
Section 145 read with Section 141(2) of the Companies Act, 2013, only the person appointed
as an auditor of the company or, where a firm is so appointed, only the partner in the firm who
is a chartered accountant, may sign the auditor’s report or sign or authenticate any other
document of the company required by law to be signed or authenticated by the auditor.
It is obvious that the person appointed makes the report; otherwise the very essence of the
appointment of a particular man or firm will be lost. In a profession, the particular skill and
reputation of the practitioner counts considerably and if anybody else is allowed to make the
report on behalf of the person appointed, then this confidence in the person will cease to be a
factor. This has other implications also from the point of view of professional responsibility; it
will create an unusual legal situation. It also has implications from the standpoint of the
practitioner. If in respect of appointments held by him, the reports are made by others, gradually
the goodwill of the practitioner will end and the clients may shift to the person actually making
the report.

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 6.12 ADVANCED AUDITING AND PROFESSIONAL ETHICS

If A, B and C were in practice as ABC & Co. Chartered Accountants, any of A or B or C could sign
as “ABC & Co.” in his own hand. But now in view of the objection raised by the Department of
Company Affairs to this practice, the Council of the Institute in the SA 700 “The Auditor’s Report on
Financial Statements” has recommended to the members who are in practice in partnership, that
signature on or authentication of the auditor’s report or any other document required to be signed
or authenticated by the auditor should be made in the following manner.
For ABC and Co.
Chartered Accountants
Firm Registration Number
Signature
(Name of the Member Signing the Audit Report)
(Designation {Partner/Proprietor})
In addition to the provisions of the Companies Act, 2013 referred to above, Clause (12) of Part
I of the First Schedule to the Chartered Accountants Act, 1949 provides that a chartered
accountant in practice shall be deemed to be guilty of professional misconduct if he allows a
person, not being a member of the Institute or a member not being his partner, to sign on his
behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements. The provision is intended to safeguard the professional purity by excluding non-
chartered accountants from signing the aforesaid documents. By excluding chartered
accountants who are not partners, it seeks to keep the line of professional responsibility clear.
Partners are mutual agents and therefore, allowing a partner to sign does not interfere with the
clarity of responsibility.
12. Place of Signature: The auditor’s report shall name specific location, which is ordinarily the
city where the audit report is signed.
13. Date of the Auditor’s Report: The auditor’s report shall be dated no earlier than the date on
which the auditor has obtained sufficient appropriate audit evidence on which to base the
auditor’s opinion on the financial statements, including evidence that:

All the statements that comprise

the financial statements,
including the related notes, have
been prepared; and
Those with the recognized
authority have asserted that they
have taken responsibility for
those financial statements.

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3.3 Auditor’s Report Prescribed by Law or Regulation: If the auditor is required by law or
regulation applicable to the entity to use a specific layout, or wording of the auditor’s report, the
auditor’s report shall refer to Standards on Auditing only if the auditor’s report includes, at a
minimum, each of the following elements:
(1) A title.
(2) An addressee, as required by the circumstances of the engagement.
(3) An Opinion section containing an expression of opinion on the financial statements and a
reference to the applicable financial reporting framework used to prepare the financial
statements.
(4) An identification of the entity’s financial statements that have been audited.
(5) A statement that the auditor is independent of the entity in accordance with the relevant ethical
requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in
accordance with these requirements. The statement shall refer to the Code of Ethics issued by
ICAI.
(6) Where applicable, a section that addresses, and is not inconsistent with, the reporting
requirements of SA 570.
(7) Where applicable, a Basis for Qualified (or Adverse) Opinion section that addresses, and is not
inconsistent with, the reporting requirements of SA 570 (Revised).
(8) Where applicable, a section that includes the information required by SA 701, or additional
information about the audit that is prescribed by law or regulation and that addresses, and is
not inconsistent with, the reporting requirements in that SA 701.
(9) A description of management’s responsibilities for the preparation of the financial statements
and an identification of those responsible for the oversight of the financial reporting process
that addresses, and is not inconsistent with, the requirements.
(10) A reference to Standards on Auditing and the law or regulation, and a description of the
auditor’s responsibilities for an audit of the financial statements that addresses, and is not
inconsistent with, the requirements.
(11) The auditor’s signature.
(12) The Place of signature
(13) The date of the auditor’s report.

3.4 Auditor’s Report for Audits Conducted in Accordance with Both Standards on
Auditing Issued by ICAI and International Standards on Auditing or Auditing
Standards of Any Other Jurisdiction:
An auditor may be required to conduct an audit in accordance with, in addition to the Standards on
Auditing issued by ICAI, the International Standards on Auditing or auditing standards of any other
jurisdiction. If this is the case, the auditor’s report may refer to Standards on Auditing in addition to

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 6.14 ADVANCED AUDITING AND PROFESSIONAL ETHICS

the International Standards on Auditing or auditing standards of such other jurisdiction, but the
auditor shall do so only if:
(a) There is no conflict between the requirements in the ISAs or such auditing standards of other
jurisdiction and those in SAs that would lead the auditor:
(i) to form a different opinion, or
(ii) not to include an Emphasis of Matter paragraph or Other Matter paragraph that,
in the particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the elements set out in Auditor’s Report
Prescribed by Law or Regulation discussed above when the auditor uses the layout or wording
specified by the Standards on Auditing. However, reference to “law or regulation” in above
paragraph shall be read as reference to the Standards on Auditing. The auditor’s report shall
thereby identify such Standards on Auditing.
When the auditor’s report refers to both the ISAs or the auditing standards of a specific
jurisdiction and the Standards on Auditing issued by ICAI, the auditor’s report shall clearly
identify the same including the jurisdiction of origin of the other auditing standards.
Supplementary Information Presented with the Financial Statements:
If supplementary information that is not required by the applicable financial reporting framework is
presented with the audited financial statements, the auditor shall evaluate:

whether such supplementary information is presented

whether, in the auditor’s professional in a way that sufficiently and clearly differentiates it
judgment, supplementary information is from the audited financial statements. If this is not the
nevertheless an integral part of the case, then the auditor shall ask management to change
financial statements due to its nature or how the unaudited supplementary information is
how it is presented. When it is an integral presented. If management refuses to do so, the auditor
part of the financial statements, the shall identify the unaudited supplementary information
supplementary information shall be and explain in the auditor’s report that such
covered by the auditor’s opinion. supplementary information has not been audited.

4. SA 701, “COMMUNICATING KEY AUDIT MATTERS IN

THE INDEPENDENT AUDITOR’S REPORT”
This SA 701 provide guidance regarding communication of Key Audit Matters. Key Audit matter are
those matters that, in the auditor’s professional judgment, were of most significance in the audit of
the financial statements of the current period. Key audit matters are selected from matters
communicated with those charged with governance.
4.1 Purpose: The purpose of communicating key audit matters is to enhance the communicative
value of the auditor’s report by providing greater transparency about the audit that was performed.

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Communicating key audit matters provides additional information to intended users of the financial
statements (“intended users”) to assist them in understanding those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial statements of the
current period. Communicating key audit matters may also assist intended users in understanding
the entity and areas of significant management judgment in the audited financial statements.
4.2 Scope: Communicating key audit matters in the auditor’s report is in the context of the auditor
having formed an opinion on the financial statements as a whole. Communicating key audit matters
in the auditor’s report is not:
(a) A substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make, or that are otherwise necessary
to achieve fair presentation;
(b) A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705 (Revised);
(c) A substitute for reporting in accordance with SA 570 (Revised) when a material
uncertainty exists relating to events or conditions that may cast significant doubt on
an entity’s ability to continue as a going concern; or
(d) A separate opinion on individual matters.
This SA applies to audits of complete sets of general purpose financial statements of listed entities
and circumstances when the auditor otherwise decides to communicate key audit matters in the
auditor’s report.
This SA also applies when the auditor is required by law or regulation to communicate key audit
matters in the auditor’s report. However, SA 705 (Revised) prohibits the auditor from communicating
key audit matters when the auditor disclaims an opinion on the financial statements, unless such
reporting is required by law or regulation.
4.3 Determining Key Audit Matters: The auditor shall determine, from the matters
communicated with those charged with governance, those matters that required significant auditor
attention in performing the audit. In making this determination, the auditor shall take into account
the following:
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315
(b) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been identified
as having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.

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 6.16 ADVANCED AUDITING AND PROFESSIONAL ETHICS

4.4 Communicating Key Audit Matters: The introductory language in this section of the
auditor’s report shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements [of the current period]; and.
(b) These matters were addressed in the context of the audit of the financial statements as a whole,
and in forming the auditor’s opinion thereon, and the auditor does not provide a separate
opinion on these matters.
Illustration
The following illustrates the presentation in the auditor’s report if the auditor has determined
there are no key audit matters to communicate:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or
Material Uncertainty Related to Going Concern section,] We have determined that there are
no [other] key audit matters to communicate in our report.]

5. SA 705, “MODIFICATIONS TO THE OPINION IN THE

INDEPENDENT AUDITOR’S REPORT”
Modified Opinions: SA 705 deals with the auditor’s responsibility to issue an appropriate report in
circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor
concludes that a modification to the auditor’s opinion on the financial statements is necessary.
The succinct requirements of this SA 705 are given below-

5.1 Types of Modified Opinions:

Types of Modified Opinions (i) Qualified Opinion
as per SA 705:

(ii) Adverse Opinion

(iii) Disclaimer of Opinion

The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements
are materially misstated or, in the case of an inability to obtain sufficient appropriate audit
evidence, may be materially misstated; and

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(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter
on the financial statements.
5.2 Objective: The objective of the auditor is to express clearly an appropriately modified opinion
on the financial statements that is necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the financial statements as
a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
5.3 Circumstances When a Modification to the Auditor’s Opinion is Required:
The auditor shall modify the opinion in the auditor’s report when:
The auditor concludes that, based on the audit The auditor is unable to obtain sufficient
evidence obtained, the financial statements as appropriate audit evidence to conclude that
a whole are not free from material the financial statements as a whole are free
misstatement; or from material misstatement.

5.4 Determining the Type of Modification to the Auditor’s Opinion:

5.4.1 Qualified Opinion: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the financial
statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
Illustrative Audit Opinion:

“The Company’s has been unable to re-negotiate or obtain replacement financing. This
situation indicates the existence of a material uncertainty that may cast significant doubt
on the Company’s ability to continue as a going concern and therefore, the Company
may be unable to realize its assets and discharge its liabilities in the normal course of business. The
financial statements (and notes thereto) do not fully disclose this fact.” You are required to identify
the type of opinion and draft the same.

In view of circumstances mentioned in SA 705, the auditor should give Qualified Opinion in above
case. Draft qualified opinion is given as under;

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 6.18 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Qualified Opinion
In our opinion, except for the incomplete disclosure of the information referred to in the Basis for
Qualified Opinion paragraph, the financial statements give the information required by the
Companies Act, 2013, in the manner so required and give a true and fair view in conformity with the
accounting principles generally accepted in India:
(a) in the case of the Balance Sheet, of the state of affairs of the company as at March 31, 20X1;
(b) in the case of the Profit and Loss Account, of the profit/ loss for the year ended on that date;
and
(c) in the case of the cash flow statement, of the cash flows for the year ended on that date.
5.4.2 Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.
CASE STUDY
“The Company’s financing arrangements expired and the amount outstanding was payable on
March 31, 20X0. The Company has been unable to re-negotiate or obtain replacement financing
and is considering filing for bankruptcy. These events indicate a material uncertainty that may
cast significant doubt on the Company’s ability to continue as a going concern and therefore it
may be unable to realize its assets and discharge its liabilities in the normal course of business.
The financial statements (and notes thereto) do not disclose this fact.” You are required to identify
the type of opinion and draft the same.
In view of circumstances mentioned in SA 705, the auditor should give Adverse Opinion in above
case. Draft qualified opinion is given as under;
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion paragraph, the financial statements do not give the information required by the
Companies Act, 2013, in the manner so required and also, do not give a true and fair view in
conformity with the accounting principles generally accepted in India:
(a) in the case of the Balance Sheet, of the state of affairs of the company as at March 31, 20X0;
and
(b) in the case of the Profit and Loss Account, of the profit/loss for the year ended on that date;
and
(c) in the case of the cash flow statement, of the cash flows for the year ended on that date.

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5.4.3 Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes
that the possible effects on the financial statements of undetected misstatements, if any, could be
both material and pervasive. The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having
obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not
possible to form an opinion on the financial statements due to the potential interaction of the
uncertainties and their possible cumulative effect on the financial statements.
Draft Disclaimer of Opinion
We were engaged to audit the financial statements of ABC & Associates (“the entity”), which
comprise the balance sheet as at March 31, 20XX, the statement of Profit and Loss, (the
statement of changes in equity) 1 and statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
We do not express an opinion on the accompanying financial statements of the entity. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on
these financial statements.

5.5 Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due

to a Management-Imposed Limitation after the Auditor Has Accepted the Engagement
If, after accepting the engagement, the auditor becomes aware that management has imposed a
limitation on the scope of the audit that the auditor considers likely to result in the need to express
a qualified opinion or to disclaim an opinion on the financial statements, the auditor shall request
that management remove the limitation.
If management refuses to remove the limitation, the auditor shall communicate the matter to those
charged with governance, unless all of those charged with governance are involved in managing
the entity, and determine whether it is possible to perform alternative procedures to obtain sufficient
appropriate audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
(a) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion;
or
(b) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive so that a qualification of the

1
Where applicable.

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opinion would be inadequate to communicate the gravity of the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under applicable law or regulation;
or
(ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or
possible, disclaim an opinion on the financial statements.

5.6 If the auditor decides to withdraw: When the auditor decides to withdraw before
withdrawing, the auditor shall communicate to those charged with governance any matters regarding
misstatements identified during the audit that would have given rise to a modification of the opinion.
5.7 Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion:
When the auditor considers it necessary to express an adverse opinion or disclaim an opinion on
the financial statements as a whole, the auditor’s report shall not also include an unmodified opinion
with respect to the same financial reporting framework on a single financial statement or one or more
specific elements, accounts or items of a financial statement. To include such an unmodified opinion
in the same report in these circumstances would contradict the auditor’s adverse opinion or
disclaimer of opinion on the financial statements as a whole.
5.8 Form and Content of the Auditor’s Report When the Opinion is Modified: When the
auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,” “Adverse
Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.
What special consideration are required for expressing Qualified Opinion?
When the auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the
matter(s) described in the Basis for Qualified Opinion section:
(a) When reporting in accordance with a fair presentation framework, the accompanying financial
statements present fairly, in all material respects (or give a true and fair view of) […] in
accordance with [the applicable financial reporting framework]; or
(b) When reporting in accordance with a compliance framework, the accompanying financial
statements have been prepared, in all material respects, in accordance with [the applicable
financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate audit evidence, the
auditor shall use the corresponding phrase “except for the possible effects of the matter(s) ...” for
the modified opinion.

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What special consideration needed for expressing Adverse Opinion?

When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s
opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion
section:
(a) When reporting in accordance with a fair presentation framework, the accompanying
financial statements do not present fairly (or give a true and fair view of) […] in accordance
with [the applicable financial reporting framework]; or
(b) When reporting in accordance with a compliance framework, the accompanying financial
statements have not been prepared, in all material respects, in accordance with [the
applicable financial reporting framework].
What special consideration is required for expressing Disclaimer of Opinion?
When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
evidence, the auditor shall:
(a) State that the auditor does not express an opinion on the accompanying financial statements;
(b) State that, because of the significance of the matter(s) described in the Basis for Disclaimer
of Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence
to provide a basis for an audit opinion on the financial statements; and
(c) Amend the statement required in SA 700 (Revised), which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit the financial
statements.

Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance with
SA 701.
What is the Basis for Modification of Opinion (Qualified/Disclaimer /Adverse)?
When the auditor modifies (Qualification/ Disclaimer/ Adverse) the opinion as above on the financial
statements, the auditor shall, in addition to the specific elements required by SA 700 (Revised):
(a) Amend the heading “Basis for Opinion” to “Basis for Qualified Opinion,” “Basis for Adverse
Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate; and
(b) Within this section, include a description of the matter giving rise to the modification.
If there is a material misstatement of the financial statements that relates to specific amounts in the
financial statements (including quantitative disclosures in the notes to the financial statements), the
auditor shall include in the Basis for Opinion section, a description and quantification of the financial
effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial
effects, the auditor shall so state in this section.

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If there is a material misstatement of the financial statements that relates to narrative disclosures,
the auditor shall include in the Basis for Opinion section an explanation of how the disclosures are
misstated.
If there is a material misstatement of the financial statements that relates to the non- disclosure of
information required to be disclosed, the auditor shall:
(a) Discuss the non-disclosure with those charged with governance;
(b) Describe in the Basis for Opinion section the nature of the omitted information; and
(c) Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable
to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted
information.
If the modification results from an inability to obtain sufficient appropriate audit evidence, the auditor
shall include in the Basis for Opinion section the reasons for that inability.
When the auditor expresses a qualified or adverse opinion, the auditor shall amend the statement
about whether the audit evidence obtained is sufficient and appropriate to provide a basis for the
auditor’s opinion to include the word “qualified” or “adverse”, as appropriate.
When the auditor disclaims an opinion on the financial statements, the auditor’s report shall not
include following elements required under SA 700
(a) A reference to the section of the auditor’s report where the auditor’s responsibilities are
described; and
(b) A statement about whether the audit evidence obtained is sufficient and appropriate to provide
a basis for the auditor’s opinion.
Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial
statements, the auditor shall describe in the Basis for Opinion section the reasons for any other
matters of which the auditor is aware that would have required a modification to the opinion, and the
effects thereof.
How Auditor should give description of Auditor’s Responsibilities for the Audit of the
Financial Statements When the Auditor Disclaims an Opinion on the Financial Statements?
When the auditor disclaims an opinion on the financial statements due to an inability to obtain
sufficient appropriate audit evidence, the auditor shall amend the description of the auditor’s
responsibilities required by SA 700 (Revised) to include only the following:
(a) A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial
statements in accordance with Standards on Auditing and to issue an auditor’s report;
(b) A statement that, however, because of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and

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(c) The statement about auditor independence and other ethical responsibilities required in SA
700.

5.9 Communication with Those Charged with Governance: When the auditor expects to
modify the opinion in the auditor’s report, the auditor shall communicate with those charged with
governance the circumstances that led to the expected modification and the wording of the
modification.

Nature of Matter Giving Rise to the Auditor’s judgment about the Pervasiveness of the
Modification: Effects or Possible Effects on the Financial
Statements

Material but not pervasive Material and pervasive

Financial Statements are materially Qualified Opinion Adverse Opinion

misstated

Inability to obtain Sufficient Qualified Opinion Disclaimer of Opinion

appropriate audit evidence

6 SA 706, “EMPHASIS OF MATTER PARAGRAPHS

AND OTHER MATTER PARAGRAPHS IN THE
INDEPENDENT AUDITOR’S REPORT”
6.1 Objective: The objective of the auditor, having formed an opinion on the financial statements,
is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear
additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of
such importance that it is fundamental to users’ understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of
such importance that it is fundamental to users’ understanding of the financial statements.
Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter other
than those presented or disclosed in the financial statements that, in the auditor’s judgment, is
relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

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6.2 When to give emphasis of Matter Paragraphs in the Auditor’s Report?

If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in
the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental
to users’ understanding of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance with SA 705 (Revised)3
as a result of the matter; and
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
These circumstances may include:
• When a financial reporting framework prescribed by law or regulation would be
unacceptable but for the fact that it is prescribed by law or regulation.
• To alert users that the financial statements are prepared in accordance with a special
purpose framework.
• When facts become known to the auditor after the date of the auditor’s report and the auditor
provides a new or amended auditor’s report (i.e., subsequent events).

6.3 When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report with an appropriate
heading that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial statements. The
paragraph shall refer only to information presented or disclosed in the financial statements;
and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
When to issue other Matter Paragraphs in the Auditor’s Report?
If the auditor considers it necessary to communicate a matter other than those that are presented or
disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall
include an Other Matter paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.

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When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall include
the paragraph within a separate section with the heading “Other Matter,” or other appropriate
heading.
Circumstances where the auditor may consider it necessary to include an
Emphasis of Matter paragraph are:
• An uncertainty relating to the future outcome of exceptional litigation or
regulatory action.
• A significant subsequent event that occurs between the date of the financial statements
and the date of the auditor’s report.
• Early application (where permitted) of a new accounting standard that has a material
effect on the financial statements.
• A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position.
Is there any duty to communicate with Those Charged with Governance?
If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s
report, the auditor shall communicate with those charged with governance regarding this expectation
and the wording of this paragraph.
Note: Student are advised to refer Illustration of Emphasis of Matter Para is given in appendix at
the end of the Chapter.

7. DISTINCTION BETWEEN NOTES ON ACCOUNTS AND

QUALIFICATIONS
As a general practice, the management would normally prefer to explain their view point and
assessment on all matters involving difference of opinion between them and the auditors by way of
notes in the financial statements, for better understanding of the facts of the matters by users of
financial statements. Such notes represents management’s stand on the matter while the auditor
records his disagreement on the matters by way of qualifications in the auditor’s report.
Students should note that client and auditor are two separate independent parties and in real life
situations, at times, the client management may insist upon the auditor for not modifying his audit
opinion considering the management has disclosed full facts and assessment of the matter through
notes on the financial statements. However, the auditor needs to exercise his professional
judgement and assess if the disclosure alone would suffice or in case, he also needs to modify his
audit report by either inserting a qualification or Emphasis of matter.

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Once auditor concludes that modification of his report in relation to the specific matter under
question, is warranted, he may choose to refer to the specific note given by the management and
thereafter, continue explaining more facts and his assessment on the matter including quantification
and impact on the various financial statements captions, to the extent possible.
The Auditor must express the nature of qualification, in a clear and unambiguous manner. Where
the Auditor answers any of the statutory affirmations in the negative or with a qualification, his report
shall state the reasons for such answer. All qualifications should be contained in the Auditor’s
Report.
Where the company has committed an irregularity resulting in a breach of law, the Auditor should
bring the same to the notice of the shareholders by properly qualifying his report. A quantified opinion
should be expressed as “except for” for the effects of the matter to which qualification related. It
would not be appropriate to use phrases such as “with the foregoing explanation” or “subject to” in
the opinion paragraph as these are not sufficiently clear or forceful.
Notes – Report Relationship – Where notes of a qualificatory nature appear in the accounts, the
Auditors should state all qualifications independently in their report so that the user can assess the
significance of these qualifications. A reference to the notes to Accounts in the Auditors’ Report does
not automatically become a qualification.
Note : Students are advised to refer examples/illustrative formats given at the end of the Chapter
for better understanding of the differences.

8. DISTINCTION BETWEEN AUDIT REPORT AND

CERTIFICATE
The term ‘report’ is used where an expression of opinion is involved. The term ‘certificate’ is
preferable where the auditor comments on or verifies facts such as a verification of investment by
inspection or the checking of ballot papers on a poll in a company meeting. Under the Companies
Act, 2013, a number of situations are there where an auditor is required to issue a certificate rather
than a report, like under Section 66 of the Companies Act, 2013, an auditor is required to file a
certificate in the tribunal where company is proposing for the reduction of capital. However, the
report under Section 143 of the Companies Act, 2013, is an opinion based report and is not a
certificate.
Some situations where Audit Reports and Certificates are required is given below -
(1) Under the Payment of Bonus Act, 1965, a chartered accountant may be required to issue a
‘report’ on the computation of bonus payable. The report may be as under:
“We have reviewed the figures in the above computation in comparison with the books and
records produced to us, the audit of which has already been completed by us and report that
subject to the notes given on face of the computation in our opinion, and to the best of our

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knowledge and belief and according to the information and explanation given to us, the above
computation is in due accordance therewith and has been made on a basis reasonably
consistent with the provisions of the Payment of Bonus Act, 1965.”
Place: For X & Co.
Date: Chartered Accountants
(2) Auditor’s Report in accordance with Regulation 54 of the SEBI (Mutual Fund)
Regulations, 1993.
(i) All Mutual funds shall be required to get their accounts audited in terms of a provision to
that effect in their trust deeds. The Auditor’s Report shall form a part of the Annual Report.
It should accompany the Abridged Balance Sheet and Revenue Account. The auditor shall
report to the Board of Trustees and not to the unit holders.
(ii) The auditor shall state whether:
1. He has obtained all information and explanations which, to the best of his knowledge
and belief, were necessary for the purpose of his audit.
2. The Balance Sheet and the Revenue Account are in agreement with the books of
account of the fund.
(iii) The auditor shall give his opinion as to whether:
1. The Balance Sheet gives a true and fair view of the scheme wise state of affairs’ of
the fund as at the balance sheet date, and
2. The Revenue Account gives a true and fair view of the scheme wise surplus/deficit
of the fund for the year/period ended at the balance sheet date.
(Note: Students are advised to refer Chapter 7 Audit Report and Certificates for Special
Purpose for detailed understanding of the topic.)

9. COMMUNICATION TO MANAGEMENT AND THOSE

CHARGED WITH GOVERNANCE
As per SA 260 Communication with Those Charged with Governance, it is auditor’s responsibility to
communicate with those charged with governance in an audit of financial statements irrespective of
an entity’s governance structure or size, particular considerations apply where all of those charged
with governance are involved in managing an entity, and for listed entities.
The objectives of the auditor are
To communicate clearly with those charged with governance the responsibilities of the auditor
in relation to the financial statement audit, and an overview of the planned scope and timing of
the audit;

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To obtain from those charged with governance information relevant to the audit;
To provide those charged with governance with timely observations arising from the audit that
are significant and relevant to their responsibility to oversee the financial reporting process; and
To promote effective two-way communication between the auditor and those charged with
governance.

The auditor shall determine the appropriate person(s) within the entity’s governance structure with
whom to communicate. If the auditor communicates with a subgroup of those charged with
governance, for example, an audit committee, or an individual, the auditor shall determine whether
the auditor also needs to communicate with the governing body .

9.1 When All of Those Charged with Governance Are Involved in Managing the
Entity: In some cases, all of those charged with governance are involved in managing the entity,
for example, a small business where a single owner manages the entity and no one else has a
governance role. In these cases, if matters required by this SA are communicated with person(s)
with management responsibilities, and those person(s) also have governance responsibilities, the
matters need not be communicated again with those same person(s) in their governance role. These
matters are noted in paragraph 16(c). The auditor shall nonetheless be satisfied that communication
with person(s) with management responsibilities adequately informs all of those with whom the
auditor would otherwise communicate in their governance capacity. (Ref: Para. A8)

9.2 Matters to Be Communicated: The auditor shall communicate with those charged with
governance the responsibilities of the auditor in relation to the financial statement audit, including
that:
(a) The auditor is responsible for forming and expressing an opinion on the financial statements that
have been prepared by management with the oversight of those charged with governance; and
(b) The audit of the financial statements does not relieve management or those charged with
governance of their responsibilities.

9.3 Planned Scope and Timing of the Audit: The auditor shall communicate with those
charged with governance an overview of the planned scope and timing of the audit, which includes
communicating about the significant risks identified by the auditor.
9.4 Significant Findings from the Audit: The auditor shall communicate with those charged
with governance:
(a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures. When
applicable, the auditor shall explain to those charged with governance why the auditor
considers a significant accounting practice, that is acceptable under the applicable financial

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reporting framework, not to be most appropriate to the particular circumstances of the entity;
(b) Significant difficulties, if any, encountered during the audit;
(c) Unless all of those charged with governance are involved in managing the entity:
i. Significant matters arising during the audit that were discussed, or subject to
correspondence, with management; and
ii. Written representations the auditor is requesting;
(d) Circumstances that affect the form and content of the auditor’s report, if any; and
(e) Any other significant matters arising during the audit that, in the auditor’s professional
judgment, are relevant to the oversight of the financial reporting process.

10. SELF REVIEW THREATS

Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances. Many threats fall into the following categories:

Advocacy
Self-review Familiarity
threats, which
Self-interest threats, which threats, which Intimidation
may occur when
threats, which may occur when may occur when, threats, which
a professional
may occur as a a previous because of a may occur when
accountant
result of the judgement needs relationship, a a professional
promotes a
financial or other to be re- professional accountant may
position or
interests of a evaluated by the accountant be deterred from
opinion to the
professional professional becomes too acting objectively
point that
accountant or of accountant sympathetic to by threats, actual
subsequent
a relative*; responsible for the interests of or perceived.
objectivity may
that judgement; others; and
be compromised;

The nature and significance of the threats may differ depending on whether they arise in relation to
the provision of services to a financial statement audit client*, a non- financial statement audit
assurance client* or a non-assurance client.
10.1 Meaning- Self Review Threats: Self-review threats, which occur when during a review of
any judgement or conclusion reached in a previous audit or non-audit engagement, or when a

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member of the audit team was previously a director or senior employee of the client. Instances where
such threats come into play are
(i) when an auditor having recently been a director or senior officer of the company, and
(ii) when auditors perform services that are themselves subject matters of audit.
Circumstances that may create self-review threats include, but are not limited to:
The discovery of a significant error during a re-evaluation of the work of the
professional accountant in public practice.
Reporting on the operation of financial systems after being involved in their design or
implementation.
Having prepared the original data used to generate records that are the subject matter of
the engagement.
A member of the assurance team* being, or having recently been, a director or officer* of
that client.
A member of the assurance team being, or having recently been, employed by the client in
a position to exert direct and significant influence over the subject matter of the engagement.
Performing a service for a client that directly affects the subject matter of the assurance
engagement.

10.2 Safeguards that may eliminate or reduce such threats to an acceptable level fall
into two broad categories:
Safeguard created by the Safeguard in the work
profession, legislation or environment.
regulation; and

11. REPORTING REQUIREMENTS IN CASE OF

COMPARATIVE INFORMATION
SA 710 Comparative Information-Corresponding Figures and Comparative Financial Statements
deals with auditor’s responsibility regarding comparative information in an audit of financial
statement. There are two different broad approaches to the auditor’s responsibilities in respect of
comparative information: Corresponding figures and Comparative financial statement.
The essential audit reporting differences between the approaches are:
(a) For corresponding figures, the auditor’s opinion on the financial statements refers to the current
period only; whereas

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(b) For comparative financial statements, the auditor’s opinion refers to each period for which
financial statements are presented.
The objectives of the auditor are to obtain sufficient appropriate audit evidence about whether the
comparative information included in the financial statements has been presented, in all material
respects, in accordance with the requirements for comparative information in the applicable financial
reporting framework; and to report in accordance with the auditor’s reporting responsibilities.

11.1 Audit Procedures for Comparative Information:

(a) Perform Specific audit Procedure: For determining that the financial statement contains
appropriately classified comparative information, the auditor should:
• Ensure that comparative information agrees with the amount and other disclosure
presented in the prior period.
• The accounting policies applied are consistent with those applied in current period.
• If there have been any changes in the application of accounting policies than they are
properly disclosed and presented.
(b) Evaluating the impact on financial statement: If the auditor becomes aware of any possible
misstatement in the comparative information, then:
• He should perform the necessary audit procedures to obtain sufficient audit evidence.
• If the auditor had audited the prior period’s financial statement than he should follow the
relevant requirements of SA 560.
(c) Written Representation: As required by SA 580, the auditor should also request written
representation. He should also obtain a specific written representation regarding any prior
period item that is disclosed in current year’s financial statement.

11.2 Audit Reporting:

(a) With Reference to Corresponding Figures: When corresponding figures are presented,
the auditor’s opinion shall not refer to the corresponding figures except in the following
circumstances:
• If the auditor’s report of the previous period contains other than an unqualified opinion.
• If the auditor is of the opinion, and he has sufficient evidence in this regard, that a
material misstatement exists in the financial statement of prior period, which was not
addressed earlier.
If the prior period financial statement are not audited, than he should obtain sufficient audit
evidence that the opening balance does not contain any material misstatement.

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 6.32 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(b) With Reference to Comparative Financial Statement: When comparative financial

statement are presented -
• The auditor’s opinion shall refer to each period for which the financial statements are
presented.
• When reporting on current period’s audit, if the auditor’s opinion on such prior period
financial statement differs from the opinion previously issued on such financial
statement, the auditor shall disclose the substantive reason for the different opinion in
other matter paragraph in his report.
• If the auditor concludes that a material misstatement is present in the previously
audited figures of financial statement, he should report it to the appropriate level of the
management and request that the predecessor auditor be informed. If then the prior
years statements are amended with new report by the predecessor auditor, then the
auditor shall report only on the current period.
(c) Reporting treatment common to both (for corresponding figures and comparative
information):
(i) If the financial statement of the prior period were audited by a predecessor auditor, the
auditor (is permitted by law or regulation to refer to the predecessor audit report – on
case of corresponding figures and decides to do so) shall state in his audit report:
• That the financial statement of the prior period were audited by a predecessor
auditor;
• The type of the opinion expressed by the predecessor auditor;
• The date of that audit report.
(ii) If the prior period financial statement were not audited than he shall report the same in
other matter paragraph in his audit report that the corresponding/comparative figures
are unaudited. However, the disclosure does not relieve him from his responsibility of
obtaining sufficient appropriate audit evidence that the opening balances do not contain
misstatements that materially affect the current period’s financial statements.

(Note: Students are advised to refer Series of SA 700 on Audit Reporting and Conclusion in addition
to SA 800 Series for better understanding)

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SA 710 Comparative Information &

Corresponding Figures

Audit Procedure Audit Reporting

1. With Reference to
Assess the consistency of corresponding figures, auditor 2. With Reference to
accounting policies used opinion should refer in his comparative figures
opinion only when

a) the auditor's opinion

Check Comparative figures
a) if previous AR is other shall refer to each period
with amount and disclosure in
than unqualified for which FS are
prior period
presented and on which
audit opinion is expressed

Determine that FS Contains b) Prior period

appropraitely classified misstatement not b) Difference in opinion
comparative information addressed on previously issued FS

Evaluate the impact of

possible misstatement in c) if prior period FS c) if previous FS audited
comparative information on unaudited by some other auditor,
FS mention the same in AR

Obtain Written d) If prior period FS

representation unaudited, mention the
same in the AR

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 6.34 ADVANCED AUDITING AND PROFESSIONAL ETHICS

12. ILLUSTRATIVE AUDIT REPORTS

Example 1- Illustration of Emphasis of Matter Para

INDEPENDENT AUDITOR’S REPORT

To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements
Opinion
We have audited the standalone financial statements of ABC Company Limited (“the Company”),
which comprise the balance sheet as at March 31, 20X1, and the statement of Profit & Loss,
(statement of changes in equity) and the statement of cash flows for the year then ended, and notes
to the financial statements, including a summary of significant accounting policies and other
explanatory information (in which are included the Returns for the year ended on that date audited
by the branch auditors of the Company’s branches located at (location of branches))13.
In our opinion, and to the best of our information and according to the explanations given to us the
aforesaid financial statements, give a true and fair view, in conformity with the accounting principles
st
generally accepted in India, of the state of affairs of the Company as at March 31 , 2XXX and
profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements as per the ICAI’s Code of
Ethics and the provisions of the Companies Act, 2013, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the financial statements of the current period. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]

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 AUDIT REPORTS 6.35

Other Matter
The financial statements of ABC Company for the year ended March 31, 20X0, were audited by
another auditor who expressed an unmodified opinion on those statements on March 31, 20X1.
Responsibilities of Management and Those Charged with Governance for the Financial
Statements
[Reporting in accordance with SA 700 (Revised) – see Illustration 1 in SA 700 (Revised) given in
Auditing Pronouncement.]
Auditor’s Responsibilities for the Audit of the Financial Statements
[Reporting in accordance with SA 700 (Revised) – see Illustration 1 in SA 700 (Revised).]
Report on Other Legal and Regulatory Requirements
[Reporting in accordance with SA 700 (Revised) – see Illustration 1 in SA 700 (Revised).]

For XYZ & Co

Chartered Accountants
(Firm’s Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation)
Example 2- Illustration of Emphasis of Matter in a situation when the business of one of the
Indian branch office of an existing foreign company- ABC Limited is being transferred by way
of slump sale to another newly incorporated subsidiary company in India- XYZ Private Limited

Relevant Note given by the management in the financial statements of India Branch Office of
ABC Limited
"During the year, ABC Limited (‘the Company’) has incorporated a private limited company ('XYZ
Private Limited') in India for the purpose of furtherance of the Company’s objectives and has entered
into a Business Transfer Agreement dated October 5, 2016 with XYZ Private Limited for transfer of
all assets and liabilities alongwith the business of India Branch Office to XYZ Private Limited on
going concern basis effective April 01, 2016. Further, the Reserve Bank of India (RBI) vide letter No.
…………………. dated December 22, 2016 has also granted approval for transfer of assets and
liabilities and business of India Branch Office to XYZ Private Limited.

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ABC Limited has confirmed that it shall provide continuing financial and operational support to its
Branch Office in India for its operations during the transitional period and loss incurred post the date
of transfer of business to XYZ Private Limited, if any, shall be borne by ABC Limited
The current year financial statements of India Branch Office have been prepared on the basis that
the Branch Office does not continue to be a going concern and all its assets are carried in the books
of accounts at the values likely to be recovered at the time of closure of operations, to the extent
ascertainable at the time of preparation of these financial statements".
INDEPENDENT AUDITOR’S REPORT
To the Members of India Branch Office of ABC Limited
Report on the Audit of the Standalone Financial Statements
Opinion
We have audited the standalone financial statements of India Branch Office of ABC Limited (“the
Company”), which comprise the balance sheet as at March 31, 20X1, and the statement of Profit &
Loss, (statement of changes in equity) and the statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies and other
explanatory information.
In our opinion, and to the best of our information and according to the explanations given to us the
aforesaid financial statements, give a true and fair view, in conformity with the accounting principles
generally accepted in India, of the state of affairs of the India Branch Office of the Company as at March
st
31 , 2XXX and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements as per the ICAI’s Code of
Ethics and the provisions of the Companies Act, 2013, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter
We draw attention to Note XX regarding India Branch Office management’s intention to close the
operations of the Branch Office subject to regulatory approvals. Accordingly, the financial statements
have been prepared on the basis that the India Branch Office does not continue to be a going
concern and provisions have been made in the books of account for the losses arising or likely to
arise on account of closure of operations including the losses on the realizability of current assets.
Our opinion is not modified in respect of this matter.

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Example 3- Qualified Opinion

Relevant Notes given by the management in the financial statements of ABC Limited
(a) During the year, the management circulated request for confirmation to key vendors of
maintenance expenses and has written-back the liabilities recorded in earlier years of ` 2
crores that have not been claimed by these vendors and have also not been responded to
management’s request for confirmation. The management is confident that the balances are
no longer payable and that no further adjustments are required to the financial statements in
this regard.
(b) During the year, the management has undertaken detailed assessment regarding advances of
`____ paid to certain project managers including `____ paid during earlier years. The
Company has incurred expenses on account of travel expense at various sites in cash and has
closing balance of `1.75 crores against which management has obtained confirmation from
respective project managers for balances aggregating ` 0.65 crores and has provided balance
amount of `1.1 crores as provision for doubtful advances. The management is confident that
the expenditure incurred is towards business operations of the Company and that no further
adjustments are required to the financial statements in this regard.
Report on the Audit of the Standalone Financial Statements
Qualified Opinion
We have audited the standalone financial statements of ABC Limited (“the Company”), which
comprise the balance sheet as at March 31, 20X1, and the statement of Profit & Loss, (statement of
changes in equity) and the statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies and other explanatory
information.
In our opinion, and to the best of our information and according to the explanations given to us the
aforesaid financial statements, subject to the matters discussed in Basis for Qualified Opinion
paragraph below, the consequential impact, if any, whereof is not quantifiable, give a true and fair
view, in conformity with the accounting principles generally accepted in India, of the state of affairs
st
of the Company as at March 31 , 2XXX and profit/loss, (changes in equity) and its cash flows for
the year ended on that date.
Basis for Qualified Opinion
(a) As stated in Note XX of the financial statements, the management has during the year
circulated request for confirmation to key vendors of maintenance expenses and written-back
the liabilities recorded in earlier years of ` 2 crores considering that these balances have not
been claimed by these vendors and they have also not responded to management request for
confirmation. In the absence of balance confirmation of these vendors, we are unable to
comment upon such write back of `2 crores and any further adjustments that may be required
to the financial statement in this regard.
(b) Attention is invited to Note____ which explains management assessment regarding advances
of `____ paid to certain project managers including `____ paid during earlier years. The

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 6.38 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Company has incurred expenses on account of travel at various sites in cash and has closing
balance of `1,75 crores against which management has obtained confirmation from respective
project managers for balances aggregating ` 0.65 crores and has provided balance amount of
`1.1 crores as provision for doubtful advances. Further, for such transactions, the Company
has not complied with provision for deduction of taxes at source.
We strongly recommend that management should undertake these transactions through
banking channels and in the absence of any confirmations, we are unable to confirm the
completeness of expenses as at year- end and consequential adjustment required to closing
tax liabilities and interest thereupon, if any.
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of
the Financial Statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the financial
statements as per the ICAI’s Code of Ethics and the provisions of the Companies Act, 2013,
and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion, except for the matters, discussed above.
Note: Students are advised to refer Illustrations of Independent Auditor’s Reports on
Financial Statements given in SA 700.
Illustration 1: An auditor’s report on financial statements of a listed entity prepared in accordance
with a fair presentation framework
Illustration 2: An auditor’s report on consolidated financial statements of a listed company prepared
in accordance with a fair presentation framework
Illustration 3 – Auditor’s Report on Financial Statements of an Unlisted Company Prepared in
Accordance with a Fair Presentation Framework
Illustration 4 – Auditor’s Report on Financial Statements of a Non Corporate Entity Prepared in
Accordance with a Fair Presentation Framework
Illustration – Auditor’s Report on Financial Statements of Non Corporate Entity Prepared in
Accordance with a General Purpose Compliance Framework
For purposes of this illustrative auditor’s report, the following circumstances are assumed:
• Audit of a complete set of financial statements of an entity, other than a listed company under the
Companies Act 2013, required by law or regulation. The audit is not a group audit (i.e., SA 600 does
not apply).
• The financial statements are prepared by management of the entity in accordance with the Financial
Reporting Framework (XYZ Laws) of Jurisdiction X (that is, a financial reporting framework,
encompassing law or regulation, designed to meet the common financial information needs of a
wide range of users, but which is not a fair presentation framework).
• The terms of the audit engagement reflect the description of management’s responsibility for the
financial statements in SA 210.

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• The auditor has concluded an unmodified (i.e., “clean”) opinion is appropriate based on the audit
evidence obtained.
• The relevant ethical requirements that apply to the audit are those of the jurisdiction.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty does
not exist related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern in accordance with SA 570 (Revised).
• The auditor is not required, and has otherwise not decided, to communicate key audit matters in
accordance with SA 701.
• Those responsible for oversight of the financial statements differ from those responsible for the
preparation of the financial statements.
• The auditor has no other reporting responsibilities required under local law.
Opinion
We have audited the financial statements of ABC & Associates (the entity), which comprise the
balance sheet as at March 31, 20X1, and the Profit and Loss Account (and the cash flow
statement) 2 for the year then ended, and notes to the financial statements, including a summary
of significant accounting policies.
In our opinion, the accompanying financial statements of the entity are prepared, in all material
respects, in accordance with XYZ Laws.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities
under those Standards are further described in the Auditor’s Responsibilities for the Audit of the
Financial Statements section of our report. We are independent of the entity in accordance with
the ethical requirements that are relevant to our audit of the financial statements, and we have
fulfilled our other responsibilities in accordance with these requirements. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Responsibilities of Management and Those Charged with Governance for the Financial
Statements 3
Management is responsible for the preparation of the financial statements in accordance with
XYZ Law and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, management is responsible for assessing the entity’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management either intends to liquidate the
entity or to cease operations, or has no realistic alternative but to do so.

2
Where applicable.
3
Or other terms that are appropriate in the context of the legal framework of the particular entity.

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 6.40 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Those charged with governance are responsible for overseeing the entity’s financial reporting
process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with SAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
Paragraph 40(b) of this SA explains that the shaded material below can be located in an Appendix
to the auditor’s report. Paragraph 40(c) explains that when law, regulation or national auditing
standards expressly permit, reference can be made to a website of an appropriate authority that
contains the description of the auditor’s responsibilities, rather than including this material in the
auditor’s report, provided that the description on the website addresses, and is not inconsistent
with, the description of the auditor’s responsibilities below.
As part of an audit in accordance with SAs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. 4
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the entity to cease to continue as a going concern.

4
This sentence would be modified, as appropriate, in circumstances when the auditor also has responsibility to issue an opinion on the
effectiveness of internal control in conjunction with the audit of the financial statements.

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We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.

Illustration – Qualified Opinion due to a Material Misstatement of the Financial Statements

For purposes of this illustrative auditor’s report, the following circumstances are assumed:
• Audit of a complete set of financial statements of a listed company (registered under the
Companies Act, 2013) using a fair presentation framework.
• The financial statements are prepared by management of the entity in accordance with the
Accounting Standards prescribed under section 133 of the Companies Act, 2013 (a general
purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility
for the financial statements in SA 210. 5
• Inventories are misstated. The misstatement is deemed to be material but not pervasive to
the financial statements (i.e., a qualified opinion is appropriate).
• The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and
the provisions of the Companies Act, 2013.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with SA 570 (Revised).
• Key audit matters have been communicated in accordance with SA 701.
• Those responsible for oversight of the financial statements differ from those responsible for
the preparation of the financial statements.
• In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.

Report on the Audit of the Standalone Financial Statements 6

Qualified Opinion
We have audited the standalone financial statements of ABC Company Limited (“the Company”),
which comprise the balance sheet as at March 31, 20XX, and the statement of Profit and Loss,
(statement of changes in equity) 7 and the statement of cash flows for the year then ended, and notes
to the financial statements, including a summary of significant accounting policies and other
explanatory information (in which are included the Returns for the year ended on that date audited

5
SA 210, Agreeing the Terms of Audit Engagements
6 The sub-title “Report on the Audit of the Standalone Financial Statements” is unnecessary in circumstances when the second sub-title
“Report on Other Legal and Regulatory Requirements” is not applicable.
7 As may be applicable.

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 6.42 ADVANCED AUDITING AND PROFESSIONAL ETHICS

by the branch auditors of the Company’s branches located at (location of branches)) 8.

In our opinion and to the best of our information and according to the explanations given to us,
except for the effects of the matter described in the Basis for Qualified Opinion section of our report,
the aforesaid financial statements give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of the Company as at March 31 st, 2XXX
and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Qualified Opinion
The Company’s inventories are carried in the Balance Sheet at ` XXX. Management has not stated
the inventories at the lower of cost and net realizable value but has stated them solely at cost, which
constitutes a departure from the Accounting Standards prescribed under section 133 of the
Companies Act, 2013. The Company’s records indicate that, had management stated the inventories
at the lower of cost and net realizable value, an amount of ` xxx would have been required to write
the inventories down to their net realizable value. Accordingly, cost of sales would have been
increased by ` xxx, and income tax, net income and shareholders’ funds would have been reduced
by ` xxx, ` xxx and ` xxx, respectively.
We conducted our audit in accordance with Standards on Auditing (SAs) specified under section
143(10) of the Companies Act, 2013. Our responsibilities under those Standards are further
described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our
report. We are independent of the Company in accordance with the Code of Ethics issued by the
Institute of Chartered Accountants of India together with the ethical requirements that are relevant
to our audit of the financial statements under the provisions of the Companies Act, 2013 and we
have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAI’s
Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our qualified opinion.
Note : Students are advised to Illustrations of Auditor’s Reports with Modifications to the Opinion
given in SA 705.
• Illustration 2: An auditor’s report containing an adverse opinion due to a material misstatement of
the consolidated financial statements.
• Illustration 3: An auditor’s report containing a qualified opinion due to the auditor’s inability to obtain
sufficient appropriate audit evidence regarding a foreign associate.
• Illustration 4: An auditor’s report containing a disclaimer of opinion due to the auditor’s inability to
obtain sufficient appropriate audit evidence about a single element of the consolidated financial
statements.

8 As may be applicable.

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Illustration – Disclaimer of Opinion due to the Auditor’s Inability to Obtain Sufficient

Appropriate Audit Evidence about Multiple Elements of the Financial Statements
For purposes of this illustrative auditor’s report, the following circumstances are assumed:
• Audit of a complete set of financial statements of an entity other than a company incorporated
under the Companies Act, 2013, using a fair presentation framework. The audit is not a group
audit (i.e., SA 600, does not apply).
• The financial statements are prepared by management of the entity in accordance with the
Accounting Standards issued by the Institute of Chartered Accountants of India (a general
purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for
the financial statements in SA 210.
• The auditor was unable to obtain sufficient appropriate audit evidence about multiple elements
of the financial statements, that is, the auditor was also unable to obtain audit evidence about
the entity’s inventories and accounts receivable. The possible effects of this inability to obtain
sufficient appropriate audit evidence are deemed to be both material and pervasive to the
financial statements.
• The relevant ethical requirements that apply to the audit are ICAI’s Code of Ethics and
applicable law/regulation
• Those responsible for oversight of the financial statements differ from those responsible for the
preparation of the financial statements.
• A more limited description of the auditor’s responsibilities section is required.
• In addition to the audit of the financial statements, the auditor has other reporting responsibilities
required under relevant law/ regulation.
Report on the Audit of the Financial Statements 9
Disclaimer of Opinion
We were engaged to audit the financial statements of ABC & Associates (“the entity”), which
comprise the balance sheet as at March 31, 20XX, the statement of Profit and Loss, (the statement
of changes in equity) 10 and statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies.
We do not express an opinion on the accompanying financial statements of the entity. Because of
the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.

9
The sub-title “Report on the Audit of the Financial Statements” is unnecessary in circumstances when the second sub-title “Report on Other
Legal and Regulatory Requirements” is not applicable.
10 Where applicable.

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 6.44 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Basis for Disclaimer of Opinion

We were not appointed as auditors of the Company until after March 31, 20X1 and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable
to satisfy ourselves by alternative means concerning the inventory quantities held at March 31, 20X0
and 20X1, which are stated in the Balance Sheets at ` xxx and ` xxx, respectively. In addition, the
introduction of a new computerized accounts receivable system in September 20X1 resulted in
numerous errors in accounts receivable. As of the date of our report, management was still in the
process of rectifying the system deficiencies and correcting the errors. We were unable to confirm
or verify by alternative means accounts receivable included in the Balance Sheet at a total amount
of ` xxx as at March 31, 20X1. As a result of these matters, we were unable to determine whether
any adjustments might have been found necessary in respect of recorded or unrecorded inventories
and accounts receivable, and the elements making up the statement of Profit and Loss (and
statement of cash flows) 11.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our responsibility is to conduct an audit of the entity’s financial statements in accordance with
Standards on Auditing and to issue an auditor’s report. However, because of the matters described
in the Basis for Disclaimer of Opinion section of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these financial statements.
We are independent of the entity in accordance with the ethical requirements in accordance with the
requirements of the Code of Ethics issued by ICAI and the ethical requirements as prescribed under
the laws and regulations applicable to the entity.
Illustration of an Auditor’s Report that Includes a Key Audit Matters Section, an Emphasis of
Matter Paragraph, and an Other Matter Paragraph
For purposes of this illustrative auditor’s report, the following circumstances are assumed:
• Audit of a complete set of financial statements of a listed company (registered under the
companies Act, 2013) using a fair presentation framework.
• The financial statements are prepared by management of the entity in accordance with the
Accounting Standards prescribed under section 133 of the Companies Act, 2013 (a general
purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for
the financial statements in SA 210.
• The auditor has concluded an unmodified (i.e., “clean”) opinion is appropriate based on the
audit evidence obtained.

11
Where applicable.

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• The relevant ethical requirements that apply to the audit are those of the ICAI’s Code of Ethics
and the provisions of the Companies Act, 2013.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with SA 570 (Revised).
• Between the date of the financial statements and the date of the auditor’s report, there was a
fire in the entity’s production facilities, which was disclosed by the entity as a subsequent event.
In the auditor’s judgment, the matter is of such importance that it is fundamental to users’
understanding of the financial statements. The matter did not require significant auditor
attention in the audit of the financial statements in the current period.
• Key audit matters have been communicated in accordance with SA 701.
• Corresponding figures are presented, and the prior period’s financial statements were audited
by a predecessor auditor. The auditor is not prohibited by law or regulation from referring to
the predecessor auditor’s report on the corresponding figures and has decided to do so.
• Those responsible for oversight of the financial statements differ from those responsible for the
preparation of the financial statements.
• In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.
Report on the Audit of the Standalone Financial Statements 12
Opinion
We have audited the standalone financial statements of ABC Company Limited (“the Company”),
which comprise the balance sheet as at March 31, 20X1, and the statement of Profit & Loss,
(statement of changes in equity) and the statement of cash flows for the year then ended, and notes
to the financial statements, including a summary of significant accounting policies and other
explanatory information (in which are included the Returns for the year ended on that date audited
by the branch auditors of the Company’s branches located at (location of branches)) 13.
In our opinion, and to the best of our information and according to the explanations given to us the
aforesaid financial statements, give a true and fair view, in conformity with the accounting principles
generally accepted in India, of the state of affairs of the Company as at March 31st, 2XXX and
profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under

12 1
The sub-title “Report on the Audit of the Standalone Financial Statements” is unnecessary in circumstances when the second sub-title
“Report on Other Legal and Regulatory Requirements” is not applicable.
13 As may be applicable

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 6.46 ADVANCED AUDITING AND PROFESSIONAL ETHICS

those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements as per the ICAI’s Code of
Ethics and the provisions of the Companies Act, 2013, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter 14
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter.
Illustration of an Auditor’s Report Containing a Qualified Opinion Due to a Departure from the
Applicable Financial Reporting Framework and that Includes an Emphasis of Matter
Paragraph
For purposes of this illustrative auditor’s report, the following circumstances are assumed:
• Audit of a complete set of financial statements of an company other than a listed company
(registered under the Companies Act, 2013) using a fair presentation framework..
• The financial statements are prepared by management of the entity in accordance with the
Accounting Standards prescribed under section 133 of the Companies Act, 2013 (a general
purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for
the financial statements in SA 210.
• A departure from the applicable financial reporting framework resulted in a qualified opinion.
• The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and the
provisions of the Companies Act, 2013.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with SA 570 (Revised).
• Between the date of the financial statements and the date of the auditor’s report, there was a
fire in the entity’s production facilities, which was disclosed by the entity as a subsequent event.
In the auditor’s judgment, the matter is of such importance that it is fundamental to users’
understanding of the financial statements. The matter did not require significant auditor
attention in the audit of the financial statements in the current period.
• The auditor is not required, and has otherwise not decided, to communicate key audit matters

14As noted in paragraph A16, an Emphasis of Matter paragraph may be presented either directly before or after the Key Audit Matters section
based on the auditor’s judgment as to the relative significance of the information included in the Emphasis of Matter paragraph.

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 AUDIT REPORTS 6.47

in accordance with SA 701.

• Those responsible for oversight of the financial statements differ from those responsible for the
preparation of the financial statements.
• In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.
Report on the Audit of the Standalone Financial Statements 15
Qualified Opinion
We have audited the standalone financial statements of ABC Limited (“the Company”), which
comprise the balance sheet as at March 31, 20X1, and the statement of Profit and Loss, (statement
of changes in equity) and the statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies and other explanatory
information (in which are included the Returns for the year ended on that date audited by the branch
auditors of the Company’s branches located at (location of branches))2.
In our opinion and to the best of our information and according to the explanations given to us,
except for the effects of the matter described in the Basis for Qualified Opinion section of our report,
the aforesaid financial statements present fairly, in all material respects, or give a true and fair view
in conformity with the accounting principles generally accepted in India of the state of affairs of the
Company as at March 31st, 2XXX and profit/loss, (changes in equity) and its cash flows for the year
ended on that date.
Basis for Qualified Opinion
The Company’s short-term marketable securities are carried in the statement of financial position at
xxx. Management has not marked these securities to market but has instead stated them at cost,
which constitutes a departure from the Accounting Standards prescribed in section 133 of the
Companies Act, 2013. The Company’s records indicate that had management marked the
marketable securities to market, the Company would have recognized an unrealized loss of `xxx in
the statement of comprehensive income for the year. The carrying amount of the securities in the
statement of financial position would have been reduced by the same amount at March 31, 20X1,
and income tax, net income and shareholders’ equity would have been reduced by `xxx, `xxx and
`xxx, respectively.
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements under the provisions of the
15
The sub-title “Report on the Audit of the Standalone Financial Statements” is unnecessary in circumstances when the second sub-title
“Report on Other Legal and Regulatory Requirements” is not applicable.

© The Institute of Chartered Accountants of India

 6.48 ADVANCED AUDITING AND PROFESSIONAL ETHICS

Companies Act, 2013, and we have fulfilled our other ethical responsibilities in accordance with
these requirements and the ICAI’s Code of Ethics. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our qualified opinion.
Emphasis of Matter – Effects of a Fire
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter.
Note: Students may refer remaining paras of Audit Report like Key Audit Matters para
etc., from the illustrative format given above.

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 AUDIT REPORTS 6.49

Theoretical Questions
1. Under the applicable Standards on Auditing, in what circumstances does the report of the statutory
auditor require modifications? What are the types of modifications possible to the said report?
2. Write a short note on Emphasis of matter paragraph in Audit Reports.
3. Write a short note on Certificate for Special Purpose vs. Audit Report.
4. Compare and explain the following:
(i) Reporting to Shareholders vs. Reporting to those Charged with Governance
(ii) Audit Qualification vs. Emphasis of Matter.
Answers to Theoretical Questions
1. Refer Para 5.
2. Refer Para 6.
3. Certificate for Special Purpose vs. Audit Report: A certificate is a written confirmation of the
accuracy of the facts stated therein and does not involve any estimate or opinion. The term
‘certificate’ is, therefore, used where the auditor verifies the accuracy of facts. An auditor may
thus, certify the circulation figures of a newspaper or the value of imports or exports of a
company. An auditor’s certificate represents that he has verified certain figures and is in a
position to vouch safe their accuracy as per his examination of documents and books of
account. A report, on the other hand, is a formal statement usually made after an enquiry,
examination or review of specified matters under report and includes the reporting auditor’s
opinion thereon. Thus, when a reporting auditor issues a certificate, he is responsible for the
factual accuracy of what is stated therein. On the other hand, when a reporting auditor gives a
report, he is responsible for ensuring that the report is based on factual data, that his opinion
is in due accordance with facts, and that it is arrived at by the application of due care and skill.
The ‘report’ involves expression of opinion which may differ from one professional to another.
There is no question of exactitude in case of a report since the information contained therein
is based on estimates and involves judgement element.
4. (i) Reporting to Shareholders vs. Reporting to those Charged with Governance:
REPORT
Reporting to Shareholders Reporting to those Charged with Governance
• Section 143 of the Companies • Standard on Auditing 260 deals with the
Act, 2013 deals with the provisions relating to reporting to those Charged
provisions relating to reporting with Governance.

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 6.50 ADVANCED AUDITING AND PROFESSIONAL ETHICS

to Shareholders. Thus, it is a
Statutory Audit Report which is
addressed to the members.
• Statutory Audit Report is on true • It is a reporting on matters those charged with
and fair view and as per governance like scope of audit, audit
prescribed Format. procedures, audit modifications, etc.
• Statutory Audit Reports are in • Reporting to those Charged with Governance is
public domain. an internal document i.e. private report.
(ii) Audit Qualification vs. Emphasis of Matter:
REPORT
Audit Qualification Emphasis of Matter
• Standard on Auditing 705 • Standard on Auditing 706 “Emphasis of
“Modifications to the Opinion in Matter Paragraphs and Other Matter
the Independent Auditor’s Paragraphs in the Independent Auditor’s
Report”, deals with the provisions Report” deals with the provisions relating
relating to Audit Qualification. to Emphasis of Matter.
• Audit Qualifications are also • Emphasis of Matter is a paragraph
known as “subject to report” or which is included in auditor’s report to
“except that report”. draw users’ attention to important
matter(s) which are already disclosed in
Financial Statements and are
fundamental to users’ for understanding
of Financial Statements.
• Audit Qualifications are given • Emphasis of Matter is a paragraph
when auditor is having which is issued when there is a
reservations on some of the uncertainty relating to future outcome of
items out of the financial exceptional litigation, regulatory action,
statements as a whole i.e. etc.; or there is early application (where
Auditor’s Judgment about the permitted) of a new accounting standard
Pervasiveness of the Effects or that has a pervasive effect on the
Possible Effects on the Financial financial statements in advance of its
Statements relating to if the effective date.
impact of material misstatements
is not pervasive on the financial
statements but is present at
some levels of the financial
statements, qualified report is
issued.

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