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Auditor’s Report How to Read

The document outlines the components and verification processes of financial statements as defined by the Companies Act, 2013, including the roles of auditors and types of audit opinions. It details the significance of the Companies (Auditor’s Report) Order, 2016 (CARO) and its applicability, along with the specific items auditors must certify. Additionally, it describes the contents of the Directors' Report, emphasizing the responsibilities and compliance required from directors regarding financial statements.

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Ashish Kumar Gupta
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2 views

Auditor’s Report How to Read

The document outlines the components and verification processes of financial statements as defined by the Companies Act, 2013, including the roles of auditors and types of audit opinions. It details the significance of the Companies (Auditor’s Report) Order, 2016 (CARO) and its applicability, along with the specific items auditors must certify. Additionally, it describes the contents of the Directors' Report, emphasizing the responsibilities and compliance required from directors regarding financial statements.

Uploaded by

Ashish Kumar Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Lesson ID 101045
Version 02/09112022
Auditor’s Report: How to Read?

CONTENTS OF The Companies Act, 2013 defines the term ‘Financial


FINANCIAL Statements’ to include:
STATEMENTS i. Balance Sheet as at the end of the FY,
ii. Statement of Profit and loss account for the FY
iii. Cash flow statement for the FY,
iv. Change in Equity Statement,
v. Notes to the Financial Statements, referred above with Significant
Accounting Policies

Apart from the above, from the lenders’ perspective, the Financial
Statements should also contains:
i. Independent / Statutory Auditors’ Report
ii. Directors’ Report (in case of Companies)
VERIFICATION Verification of financial statements include-
OF FINANCIAL i. Verification of items of financial statements
STATEMENTS ii. Verification of KYC of Auditor
iii. Verification of CA Certificates: https://udin.icai.org

AUDITORS’ Unqualified / Clean


Issued when Financial Statements,
REPORT /

Are prepared and presented in compliance with
OPINION Accounting Standards and Policies
 Are in conformity with books of accounts
 Contain complete disclosure of all the material facts to meet
all Statutory Requirement
 Are free from material misrepresentation of facts
MODIFIED Issued when Financial Statements,
REPORTS /  Are not giving true and fair view of the financial
OPINION position
 Contains materially misstated facts
 Are not in compliance with Accounting Standards, Policies, Books of
accounts
MODIFIED Qualified
Issued when Financial Statements,
REPORTS /
Matters are not reported but reporting are necessary to
OPINION: TYPES understand the financial statements
 Reporting is not in conformity with the guidelines and having
substantial impact
 Contains misstatement
If received by banker,
 Ascertain the reasons for qualifications
 Sought management’s views / comments
Do Necessary adjustments in the analysis if the management’s
responses are acceptable to our satisfaction.
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Adverse
Issued when Financial Statements,
 Not in conformity with the Accounting Standards
 Are materially misstated
 Are grossly misrepresented

This is considered as worst type of financial report Primarily not reliable,


can’t be analysed.

Still in some cases, where the impact is quantified & the reasons are
acceptable, necessary adjustments should be made.
Disclaimer Issued when Financial Statements,
 Not possible to form an opinion on the FS due to various reason
 In extremely rare circumstanceswhere Auditors find multiple
uncertainties
These reports cannot be relied upon and requires to be
rejected.

Fresh opinion should be sought for further action.


CARO Companies (Auditor’s Report) Order, 2016 (CARO) is part of Auditors’
Report but not applicable to,
Companies i. One Person Companies
(Auditor’s Report) ii. Small Companies means a Company whose Paid up Capital is up
to Rs. 50 lakh or turnover is up to Rs. 2 crore
Order iii. Banking and Insurance Companies
iv. Private Companies, means a Company whose
a) Capital + Reserves or borrowings from Banks & Financial
Institutions, not exceeding Rs. 1 crore
b) Turnover not exceeding Rs. 10 crore
CARO : CARO contains certification of the Auditor on 16 items:
i. Fixed Assets: Maintenance of proper records, Verification of
CONTENTS all major assets at reasonable intervals, Whether the title deeds
are held in the name of the Company.
ii. Inventories: Comments on physical verification, Frequency
of verification, Discrepancies.
iii. Unsecured Loans: Whether the Company has granted
unsecured loan, Terms & conditions of such loan,
Repayment terms and whether regular or irregular.
iv. Loans, investment, guarantees and security Related Party:
Compliance of the provisions of Section 186 of the Companies Act,
2013
v. Deposits from Public: whether the Company has accepted
deposit or not.
vi. Maintenance of cost records: Compliance of the rules made by
the Central Government for the maintenance of cost records
under Section 148(1) of the Companies Act 2013.
vii. Statutory Dues: Whether paid regularly, is there any overdue,
is there any disputed tax liabilities.
viii. Default in repayment to lenders / financial institutions: Is
there any default in repayment.
ix. Funds through IPO/FPO, use of funds availed on long term
basis: Whether the Company has raised any moneys by way
of initial public offer, further public offer (including debt
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instruments). Whether the term loans have been used for the
purpose for which the loans were obtained.
x. Fraud: Whether any fraud by the Company or on the Company by
its officers or employees has been noticed.
xi. Managerial Remuneration: Compliance of provisions of Section
197 read with Schedule-V of the Companies Act 2013 with
regard to managerial remuneration.
xii. Whether the Company is a Nidhi Company, if yes, whether the
Nidhi Rules, 2014 are applicable.
xiii. Transactions with Related Party: Whether the Company has
entered into transactions with related parties in
compliance with the provisions of Section 177 and 188 of the Act.
xiv. Whether the Company has made any preferential
allotment or private placement of shares or fully or partly
convertible debentures.
xv. Whether the Company has entered into any non-cash
transactions as referred in Section 192 of the Act with its
directors or persons connected with it.
xvi. Whether the Company is required to be registered under Section
45-IA of the Reserve Bank of India Act, 1934.
DIRECTORS’  Financial Results: Past / Present / Future
 Dividend Policy
REPORT:  Directors’ responsibility statement
CONTENTS  Compliance of Accounting Standards
 True & Fair view of Financial Statements
 Proper maintenance of books / records
 Assurance on Going Concern
 Adequate Internal Financial Control
 Compliance of all applicable laws
 Management views / comments on the
Auditors’ opinion
 Disclosures as required under Law

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