1. LATEST AUDIT REPORTING REQUIREMENTS INCLUDING IFC
Regional Conference
of Northern Indian Regional Council of the ICAI
At: Hotel Le Meridien, New Delhi
PRESENTATION ON
LATEST AUDIT REPORTING REQUIREMENTS INCLUDING IFC
C.A. Sanjay Vasudeva
S. C. Vasudeva & Co.
Chartered Accountants
January 7, 2017

2. Presentation Overview :
Auditor’s Report
Section-1: Audit Report - Standards on Auditing (SA )
Section-2: Audit Report - Sec 143 – Companies Act, 2013
Section-3: Audit Report - Internal Financial Controls 2

3. 1
Audit Report - Standards on Auditing 700® +701 (New) +705 ® +706 ® (Ex.Draft.) ) 3

4. ICAI Announcement 17-May-2016:
Audit Report – Standards on Auditing
SA-700
ICAI Announcement 17-May-2016:
The ICAI. vide Announcement dated 17th May 2016 has released various Revised Standards on Auditing as under:
Revised SA 700, Forming an Opinion and Reporting on Financial Statements
New SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report
Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
Revised SA 260, Communication with Those Charged with Governance
Revised SA 570, Going Concern
On 3rd December, 2015 ICAI had issued Exposure Drafts of above Revised Standards on Auditing, for Comments from it’s Members to be sent latest by January 18, 2016.
After consideration of the suggestions/ comments from it’s members, the ICAI has issued these standards. 4

5. List of Standards on Auditing on Reporting:
Overview on Standards on Auditing
SA-700
List of Standards on Auditing on Reporting:
Standards on Auditing
Name
Audit Conclusions and Reporting
700
Forming an Opinion and Reporting on Financial Statements
701
Communicating Ket Audit Matters in the Independent Auditors Report.
705
Modifications to the Opinion in the Independent Auditor’s Report
706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
710
Comparative Information—Corresponding Figures and Comparative Financial Statements
720
The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements 5

6. List of Standards on Auditing on Reporting :
Overview on Standards on Auditing
SA-700
List of Standards on Auditing on Reporting :
Standards on Auditing
Name
Specialized Areas
800
Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
805
Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
810
Engagements to Report on Summary Financial Statements 6

7. General Structure of Standards on Auditing :
Overview on Standards on Auditing
General Structure of Standards on Auditing :
New Format of SAs - IAASB Clarity Convention
Introduction: The ‘Introduction’ section deals the purpose and scope of the Standard, subject matter of the Standard and effective date of the Standard.
Objectives: The ‘Objectives’ section provides the reference in which the Requirements are elaborated in the Standard. The aim of
the auditor is to achieve the Objectives as specified in all Standards of Auditing (SAs).
Definitions: The ‘Definitions’ section deals with the meaning attributed to certain expressions for the purpose of SAs. The aim is to assist the auditors to ensure consistent application of the Standards.
Requirements: The fundamental principles of the Standard are contained in the Requirements section and presented by use of
“shall”. Hitherto, the word, “should” was used in the Standards, for this purpose. Further, this format also does away with the need
to present the principles laid down by the Standard in bold text. The ‘Requirements’ section also contains cross reference to the
relevant Application and Other Explanatory Material.
Application and Other Explanatory Material: The ‘Application and Other Explanatory Material’ contained in an SA is an integral
part of the SA as it provides further explanation of, and guidance for carrying out, the requirements of an SA, along with the
background information on the matters addressed in the SA. It may include examples of procedures, some of which the auditor may
judge to be appropriate in the circumstances. Such guidance is, however, not intended to impose a requirement. Appendices which
form part of Application and Other Explanatory Material are an integral part of a Standard. 7

8. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2017.
Overview:
Objective
Requirements - Forming an Opinion on Financial Statements
Requirements - Form of Opinion
Key Amendments vis-à-vis SA 700 [w.e.f. April 1, 2011]
Auditor’s Report - Details
Standard on Auditing (SA) 700 (Revised) “Forming an Opinion and Reporting on Financial Statements” 8

9. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-700 (Revised)
Objective:
The objectives of the auditor are to:
Form an opinion on the Financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained;
and
Express clearly that opinion through a written report. 9

10. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Requirements :
Forming an Opinion on the Financial Statements
The auditor shall form an opinion on whether the Financial Statements are prepared in all material respects in accordance with the Financial reporting Framework
In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
Opinion- FR framework- reasonable assurance whether FS are free from misstatements- 10

11. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Requirements :
That conclusion shall take into account:
The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit evidence has been obtained;
The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are material, individually or in aggregate; and
Evaluations on certain matters as outlined
SA 330- Auditor’s Response to Assessed Risks,
SA 450-Evaluation of Misstatements identified during an audit
Example with Sanjay Sir
SA 450; Statement of Uncorrected Misstatements presented to Audit Committee who in-turn decided to get it corrected, though within the Materiality Threshold.
In a case, where auditors presented the list of uncorrected misstatements,
items of slow moving inventory items were not revalued at NRV, being lower than cost.
Amount involved was well below the Audit Materiality Threshold.
However Audit Committee recommended to get it corrected and adjusted in Financial Statements. 11

12. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Requirements :
Auditor shall evaluate whether the financial statements,
are prepared in all material respects, in accordance with the requirements of the applicable financial reporting framework.
this evaluation shall include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments
Management makes a number of judgments about the amounts and disclosures in the financial statements.
SA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices. In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware of possible bias in management’s judgments. The auditor may conclude that the cumulative effect of a lack of neutrality, together with the effect of uncorrected misstatements, causes the financial statements as a whole to be materially misstated.
Indicators of a lack of neutrality that may affect the auditor’s evaluation of whether the financial statements as a whole are materially misstated include the following:
- The selective correction of misstatements brought to management’s attention during the audit (e.g., correcting misstatements with the effect of increasing reported earnings, but not correcting misstatements that have the effect of decreasing reported earnings).
- Possible management bias in the making of accounting estimates.
Possible Management Bias-
SA 540 (Revised) addresses possible management bias in making accounting estimates. Indicators of possible management bias do not constitute misstatements for purposes of drawing conclusions on the reasonableness of individual accounting estimates. They may, however, affect the auditor’s evaluation of whether the financial statements as a whole are free from material misstatement.
For example: extensive provision for warranties, to suppress the real profits, or vice versa. 12

13. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Requirements :
Auditor shall evaluate the following requirements:
Adequate disclosure and application of significant accounting policies.
Consistency in accounting policies.
Reasonability of accounting estimates made by the management.
Relevant, reliable, comparable and understandable financial statements.
Adequate disclosure to enable the users to understand the effect of material transactions.
Terminology used is appropriate. 13

14. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Requirements :
When the financial statements are prepared in accordance with a fair presentation framework, the evaluation shall also include whether the financial statements achieve fair presentation. The auditor’s evaluation as to whether the financial statements achieve fair presentation shall include consideration of:
The overall presentation, structure and content of the financial statements; and
Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.
The auditor shall evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework 14

15. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Form an Opinion:
Unmodified opinion:
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:
The financial statements present fairly, in all material respects, in accordance with [the applicable financial reporting framework]; or
The financial statements give a true and fair view of in accordance with [the applicable financial reporting framework]. 15

16. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-700 (Revised)
SA 700
Form an Opinion:
Modified opinion:
Modified Report is expressed when Auditor
concludes that, based on the audit evidence obtained, the financial statements are not free from material misstatement, or
Is unable to obtain appropriate audit evidence to conclude that the FS as a whole are free from Material Misstatement, (In accordance with SA 705). 16

17. Audit Report – Standards on Auditing
SA-700
SA-700 (Revised)
SA 700
Key Amendments:
Change in Audit Report Format - Paragraph Placement.
Going Concern Coverage.
[in Management Responsibility Paragraph as well as Auditors Responsibilities Paragraph]
Key Audit Matters [Refer SA 701]
Under para “Basis of Opinion”; a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit.
Management Responsibility [new clauses]
Auditors’ Responsibility [new clauses] 17

18. Audit Report – Standards on Auditing
SA-700
Auditor’s Report Format:
SA-700 (Revised)
SA 700
SA 700 Revised (wef )]
SA 700 (wef )]
Title - “Independent Auditors’ Report”
Addressee – “Shall be addressed as required by the circumstances of the engagement.”
Auditor’s Opinion
Basis for Opinion
Going Concern - Where applicable, the auditor shall report in accordance with SA 570
Key Audit Matters
Management’s Responsibility
Auditor’s Responsibility
Other Reporting Responsibilities
Date, Place of Signature
Audit Report (Unmodified)
Title - “Independent Auditors’ Report”
Addressee – “Shall be addressed as required by the circumstances of the engagement.”
Introductory Paragraph
Management’s Responsibility
Auditor’s Responsibility
Auditor’s Opinion-
Other Reporting Responsibilities
Date, Place of Signature
Audit Report (Unmodified)
In case of some entities, the appropriate reference may be to those charged with governance. 18

19. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Auditors’ Opinion - heading “Opinion.”
The Opinion section of the auditor’s report shall also:
Identify the entity whose financial statements have been audited;
State that the financial statements have been audited;
Identify the title of each statement comprising the financial statements;
Refer to the notes, including the summary of significant accounting policies; and
Specify the date of, or period covered by, each financial statement comprising the financial statements.
[Same as “Introductory Paragraph” as per Earlier SA 700]
When expressing an unmodified opinion, shall include
Presented fairly, in all material respects, or
Give a true and fair view
in accordance with the applicable financial reporting framework. 19

20. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Basis of 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; (Ref: Para. A28)
(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. 20

21. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Going Concern:
Where applicable, the auditor shall report in accordance with SA 570 (Revised).
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.
Could be public interest entities, Fis such as banks, insurance companies etc.
Also the reporting on key audit matters should be agreed in the engagement letter 21

22. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Responsibilities of Management for the Financial Statements
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the financial statements in accordance with the applicable financial reporting framework, 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; and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern. The explanation of management’s responsibility for this assessment shall include a description of when the use of the going concern basis of accounting is appropriate.
This section 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 as above.
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. 22

23. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Auditors’ Responsibilities
Shall state that the objectives of the auditor are to :
(a) obtain reasonable assurance about whether the financial statement as a whole are free from material misstatement, whether due to fraud or error.
(b) Issue an auditor’s report that includes the auditor’s opinion.
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
State that misstatements can arise from fraud or error, and either
describe that they are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users or
provide a definition or description of materiality in accordance with the applicable financial reporting framework.
The responsibilities of the auditor and the management are clearly separate
Materiality in the context of the accounting standards notified or others as followed by the entity 23

24. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Auditors’ Responsibilities
Shall state that the auditor exercises professional judgment and maintains professional skepticism throughout the audit.
The auditor shall describe that the auditor’s responsibilities are :
To identify and assess the risk of material misstatement
To design and perform audit procedures responsive to those risks
To obtain audit evidence that is sufficient and appropriate to provide basis for the auditor’s opinion.
To obtain an understanding of internal control relevant to the audit
To evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
To conclude on the appropriateness of management’s use of the going concern basis of accounting
To evaluate the overall presentation, structure and content of the financial statements, including the disclosures. 24

25. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
Auditors’ Responsibilities
State that the auditor communicates with those charged with governance regarding the planned scope and timing of the audit and significant audit findings, including any significant deficiencies identified in internal control.
State that the auditor provides those charged with governance with a statement that the auditor has complied with relevant ethical requirements
For 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.
Note: The description of the auditor’s responsibilities shall be located:
within the body of the auditor's report.
Within an appendix to the auditor’s report
By a specific reference within the auditor’s report to the location of such a description on a website of an appropriate authority
Under ethical requirements- all relationships which may impact independence and the safeguards
On the website, only if permitted by law or regulator and cannot contradict requirements of para 38-39 25

26. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
Auditor’s Report Format:
SA-700 (Revised)
SA 705
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:
Title.
Addressee
Opinion section [containing an expression of opinion on the financial statements and a reference to the applicable financial reporting framework ]
An identification of the entity’s financial statements that have been audited.
A statement that the auditor is independent of the entity.
Going Concern - Where applicable
Where applicable, a section that includes the information required by SA 701
A description of management’s responsibilities
A reference to Standards on Auditing and the law or regulation, and a description of the auditor’s responsibilities for an audit
Auditors’ Signature / Date / Place 26

27. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2017.
Overview:
Objective
Requirements - Forming an Opinion on Financial Statements
Requirements - Form of Opinion
Auditor’s Report
Standard on Auditing (SA) “Communicating Key Audit Matters in the Independent Auditor’s Report” 27

28. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Introduction:
SA 701 deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report. It is intended to address:
both the auditor’s judgment as to what to communicate in the auditor’s report and
the form and content of such communication.
Purpose is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit.
Communicating 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 substitute for disclosures in the financial statements
A substitute for the auditor expressing a modified opinion
A substitute for reporting in accordance with SA 570 (Revised) or
A separate opinion on individual matters. 28

29. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Introduction:
This SA applies to audits of complete set 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 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.
Auditor’s judgement as to what to communicate and the form and content of such communication 29

30. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Objectives:
The objective of the auditor are:
to determine key audit matters and, having formed an opinion on the financial statements, communicate those matters by describing them in the auditor’s report.
Definition of ‘Key audit matters’
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. 30

31. Determining Key Audit Matters:
SA-700
Audit Report – Standards on Auditing
SA-701
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 making this determination, the auditor shall take into account the following :-
Areas of significant risks identified in accordance with SA 315.
Significant auditor judgments relating to areas that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty.
The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the above matters were of most significance in the audit of financial statements of the current period and therefore are the key audit matters. 31

32. Communicating Key Audit Matters:
SA-700
Audit Report – Standards on Auditing
SA-701
Communicating Key Audit Matters:
The auditor shall describe each key audit matter using an appropriate subheading under the heading “Key Audit Matters”.
The introductory language of this section shall state that:
Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements.
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.
“Not a Substitute for Expressing a Modified Opinion”
The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion as a result of that matter. 32

33. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Communicating Key Audit Matters: (cont..)
Descriptions of Individual Key Audit Matters
The description of each key audit matter in the Key Audit Matters section of the auditor’s report shall include a reference to the related disclosure(s), if any, in the financial statements and shall address:
(a) Why the matter was considered to be one of most significance in the audit and therefore determined to be a key audit matter; and
(b) How the matter was addressed in the audit. 33

34. Communicating Key Audit Matters: (cont..)
SA-700
Audit Report – Standards on Auditing
SA-701
Communicating Key Audit Matters: (cont..)
Circumstances in which a matter determined to be a Key Audit Matter is not communicated in Auditor’s Report:
The auditor shall describe each key audit matter in the auditor’s report unless:
(a) Law or regulation precludes public disclosure about the matter.
(b) In extremely rare circumstances, the auditor determines that the matter should not be communicated because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. This shall not apply if the entity has publicly disclosed information about the matter. 34

35. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Communicating Key Audit Matters: (cont..)
Interaction between Key Audit Matters and Other Elements :-
A matter giving rise to a modified opinion or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern are by their nature key audit matters. However, in such circumstances, these matters shall not be described in the Key Audit Matters section of the auditor’s report. Rather the auditor shall:
(a) Report on these matters in accordance with the applicable SA(s); and
(b) Include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty Related to Going Concern section(s) in the Key Audit Matters section. 35

36. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Communicating Key Audit Matters: (cont..)
Form and Content of the Key Audit Matters Section in Other Circumstances
If the auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate or that the only key audit matters communicated are those matters addressed by earlier paragraph, the auditor shall include a statement to this effect in a separate section of the auditor’s report under the heading “Key Audit Matters.” 36

37. Communication with Those Charged with Governance:-
SA-700
Audit Report – Standards on Auditing
SA-701
Communication with Those Charged with Governance:-
The auditor shall communicate with those charged with governance:
(a) Those matters the auditor has determined to be the key audit matters; or
(b) Depending on the facts and circumstances of the entity and the audit, the auditor’s determination that there are no key audit matters to communicate in the auditor’s report. 37

38. Audit Report – Standards on Auditing
SA-700
Audit Report – Standards on Auditing
SA-701
Documentation:-
The auditor shall include in the audit documentation:
(a) The matters that required significant auditor attention and the rationale for the auditor’s determination as to whether or not each of these matters is a key audit matter; or
(b) Where applicable, the rationale for the auditor’s determination that there are no key audit matters to communicate in the auditor’s report
(c) Where applicable, the rationale for the auditor’s determination not to communicate in the auditor’s report a matter determined to be a key audit matter. 38

39. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2017.
Overview:
Types of Modified Opinion
Objective
Definition
Requirements
Determining the Type of Modification
Form and Content of the Auditor’s Report When the Opinion Is Modified
Communication with Those Charged with Governance
SA705 (Revised): Modification to the opinion in the Independent Auditor’s Report 39

40. Types of Modified Opinions:
Audit Report – Standards on Auditing
SA-700
SA-705 (Revised)
SA 705
Types of Modified Opinions:
This SA establishes three types of modified opinions, namely,
a qualified opinion,
an adverse opinion, and
a 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
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. 40

41. Types of Modified Opinions:
Audit Report – Standards on Auditing
SA-705 (Revised)
SA 705
Types of Modified Opinions:
Nature of Matter Giving Rise to the Modification
Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statements
Material but Not Pervasive
Material and Pervasive
Financial statements are materially misstated
Qualified opinion
Adverse opinion
Inability to obtain
sufficient appropriate
audit evidence
Disclaimer of opinion 41

42. Audit Report – Standards on Auditing
SA-705 (Revised)
SA 705
Objective:
The objective of the auditor is to express clearly an appropriately modified opinion on the financial statement 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. 42

43. Audit Report – Standards on Auditing
SA-705 (Revised)
SA 705
Definitions :
Pervasive –Pervasive effects on the financial statements are those that, in the auditor’s judgment:
Are not confined to specific elements, accounts or items of the financial statements;
If so confined, represent or could represent a substantial proportion of the financial statements; or
In relation to disclosures, are fundamental to users’ understanding of the financial statements.
Modified opinion – A qualified opinion, an adverse opinion or a disclaimer of opinion.
Pervasive –a term used in the context of the misstatements, to describe the effects on the FS or the possible effects on the FS of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence
Example of Pervasive:
Not Confined to any item of FS:
- Govt Adverse Policies
Old Technology
Substantial proportion
Revenue vis-à-vis Tax
Subsidy from Govt. in case of subsidised goods. 43

44. Audit Report – Standards on Auditing
SA-705 (Revised)
SA 705
Requirements:
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 evidence obtained, 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. {Fraud Risk}
This conclusion takes into account the auditor’s evaluation of uncorrected misstatements, if any, on the FS in accordance with SA 450.
Elaborate on misstatements –include para A3 in SN
ACPD amount, classification, presentation and disclosure of a financial statement item
Accordingly a material misstatement may arise in relation to :
The appropriateness of the selected accounting policies
The application of the selected accounting policies
The appropriateness or adequacy of disclosures in the FS
Inability to obtain sufficient appropriate audit evidence –earlier called limitation on scope – beyond the control of the entity, nature and timing of auditor’s procedures, limitation imposed by the management
Earlier disagreement, scope limitation (paras A6 to A11)
Limitations imposed by management may have other implications for the audit, such as for the auditor’s assessment of fraud risks and consideration of engagement Continuance
SA240 – Fraud risk factors - Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.
The auditor shall evaluate whether the information obtained from the other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present. While fraud risk factors may not necessarily indicate the existence of fraud, they have often been present in
circumstances where frauds have occurred and therefore may indicate risks of material misstatement due to fraud.
Example for Limitations imposed by management, which may give rise to Fraud Risk:
Management prevents the auditor from observing the counting of the physical inventory.
Management prevents the auditor from requesting external confirmation of specific account balances.
Sec 143(12) of Companies Act, 2013:
Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. 44

45. Determining the Type of Modification:
Audit Report – Standards on Auditing
SA-705 (Revised)
SA 705
Determining the Type of Modification:
Qualified Opinion
The auditor shall express a qualified opinion when:
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
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.
Format of Audit Report (Qualified) 45

46. Determining the Type of Modification:
Audit Report – Standards on Auditing
SA-705 (Revised)
SA 705
Determining the Type of Modification:
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. 46

47. Determining the Type of Modification:
Audit Report – Standards on Auditing
SA-700
SA-705 (Revised)
SA 705
Determining the Type of Modification:
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.
in extremely rare circumstances involving multiple uncertainties, concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
Disclaimer of Opinion
Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a Management-Imposed Limitation after the Auditor Has Accepted the Engagement
Para 13. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the implications as follows:
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
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 opinion would be inadequate to communicate the gravity of the situation, the auditor shall: (Ref: Para A13-A14)
Resign from the audit, where practicable and not prohibited by law or regulation; or
If resignation from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements.
14. If the auditor resigns as contemplated by paragraph 13(b)(i), before resigning, 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. (Ref: Para. A15) 47

48. Determining the Type of Modification:
Audit Report – Standards on Auditing
SA-700
SA-705 (Revised)
SA 705
Determining the Type of Modification:
Disclaimer of Opinion
Illustrative Disclosure as per Earlier SA 705
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
Illustrative Disclosure as per Revised SA 705
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. 48

49. Communication to Those Charged with Governance:
Audit Report – Standards on Auditing
SA-700
SA-705 (Revised)
SA 705
Communication to 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. In case of limitation impose by management, the auditor shall communicate the matter to those charged with governance, unless all of those charged with governance are involved in managing the entity 49

50. SA706(Revised): Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
This SA is effective for audits of financial statements for periods beginning on or after April 1, 2017.
Overview:
Scope
Objective
Definition
Requirements 50

51. Audit Report – Standards on Auditing
SA-706 (Revised)
SA 706
Scope:
This Standard on Auditing (SA) deals with additional communication in the auditor’s report when the auditor considers it necessary to:
Draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or
Draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
This SA addresses the relationship between key audit matters and any additional communication in the auditor’s report in accordance with this SA 51

52. Audit Report – Standards on Auditing
SA-706 (Revised)
SA 706
Scope:
SA 570 (Revised) establishes requirements and provides guidance about communication in the auditor’s report relating to going concern.
Other Standards on Auditing (SAs) may contain specific requirements for the auditor to include Emphasis of Matter paragraphs or Other Matter paragraphs in the auditor’s report. In those circumstances, the requirements in this SA regarding the form and placement of such paragraphs apply.
Such as:
SA 250 (Revised) - Consideration of laws and regulations in an audit of financial statements
SA 540 (Revised) - Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
SA 250- In case mgt. does not take remedial action which the auditor considers necessary- Other Matters
In exceptional cases, the auditor may consider whether, unless prohibited by law or regulation, withdrawal from the engagement is necessary when management or those charged with governance do not take the remedial action that the auditor considers appropriate in the circumstances, even when the noncompliance is not material to the financial statements. When deciding whether withdrawal from the engagement is necessary, the auditor may consider seeking legal advice. If withdrawal from the engagement is prohibited, the auditor may consider alternative actions, including describing the non-compliance in an Other Matter(s) paragraph in the auditor’s report.
SA 570- Going concern assumption.
See marked portions of those standards 52

53. Audit Report – Standards on Auditing
SA-706 (Revised)
SA 706
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 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
As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report. 53

54. Audit Report – Standards on Auditing
SA-706 (Revised)
SA 706
Definitions:
For the purposes of the SAs, the following terms have the meanings attributed below:
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. 54

55. Audit Report – Standards on Auditing
SA-706 (Revised)
SA 706
Requirements :
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) 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. 55

56. Audit Report – Standards on Auditing
SA-700
SA-706 (Revised)
SA 706
Requirements :
Circumstances in Which an Emphasis of Matter Paragraph May Be Necessary:-
Certain specific standards contain specific requirements for the auditor to include EOM in the auditors report in certain circumstances. These 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)
Could also refer to SA 570 Going Concern and SA 540 Accounting of Estimates
Widespread use diminishes the effectiveness, to be restricted only to matters covered in the FS 56

57. Audit Report – Standards on Auditing
SA-700
SA-706 (Revised)
SA 706
Requirements :
Circumstances in Which an Emphasis of Matter Paragraph May Be Necessary:-
Examples of 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
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.
Could also refer to SA 570 Going Concern and SA 540 Accounting of Estimates
Widespread use diminishes the effectiveness, to be restricted only to matters covered in the FS 57

58. Audit Report – Standards on Auditing
SA-706 (Revised)
SA 706
Requirements :
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 58

59. Audit Report – Standards on Auditing
SA-700
SA-706 (Revised)
SA 706
Requirements :
Circumstances in Which an Other Matter Paragraph May Be Necessary:-
Relevant to Users’ Understanding of the Audit
Relevant to Users’ Understanding of the Auditor’s Responsibilities or the Auditor’s Report
Reporting on more than one set of financial statements
Restriction on distribution or use of the auditor’s report
See SA 705
Example:
We did not audit the financial statements of certain subsidiaries, whose financial statements reflect total assets (net) of Rs. XXXX as at March 31, 20XX, total
revenues of Rs. XXXX and net cash outflows amounting to Rs. XXXX for the year then ended. These financial statements have been audited by other auditors whose reports have been furnished to us by the Management, and our opinion is based solely on the reports of the other auditors. Our opinion is not qualified in respect of this matter. 59

60. Audit Report – Standards on Auditing
SA-700
SA-706 (Revised)
Relationship between Emphasis of Matter Paragraphs and Key Audit Matters in the Auditor’s Report :
When SA 701 applies, the use of Emphasis of Matter paragraphs is not a substitute for a description of individual key audit matters.
Matters determined as key audit matters may also be, in the auditor’s judgment, fundamental to users’ understanding of the financial statements.
In such cases, in communicating the matter as a key audit matter, the auditor may wish to highlight or draw further attention to its relative importance.
The auditor may do so by presenting the matter more prominently than other matters in the Key Audit Matters section or by including additional information in the description of the key audit matter to indicate the importance of the matter to users’ understanding of the financial statements.
Matter that is not determined to be a key audit matter, but which, in the auditor’s judgment, is fundamental to users’ understanding of the financial statements (e.g., a subsequent event). If the auditor considers it necessary to draw users’ attention to such a matter, the matter is included in an Emphasis of Matter paragraph in the auditor’s report 60

61. 2
Audit Report Section Companies Act 2013 61

62. Requirements of Section 143(3):
Audit Report – Companies Act, 2013
SA-700
Requirements of Section 143(3):
Key changes :
Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements.
The observations or comments of the auditors on financial transactions or matters which have an adverse effect on the functioning of the company – Section: 143(3)(f) (ICAI Guidance Note on April 20, 2015)
Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith - Section: 143(3)(h) (ICAI Guidance Note on April 20, 2015)
Sec 143(3) requirements:
As required by section 143(3) of the Act, we report that:
We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;
In our opinion, proper books of account, as required by law have been kept by the Company so far, as appears from our examination of such books and proper returns adequate for the purposes of our audit have been received from branches not visited by us.
We have received the reports on the accounts of the Branch offices of the company audited under sub-section (8) of Section 143 by other auditors and have appropriately dealt with these while forming our audit opinion. The financial statements dealt with by this report are in agreement with the books of account and with the audited returns received from these Branch offices;
The Balance Sheet, Statement of Profit and Loss and Cash Flow Statement (in case applicable) dealt with by this Report are in agreement with the books of account and returns;
In our opinion the company’s Balance Sheet, Statement of Profit and Loss and Cash Flow Statement (in case applicable) comply with the Accounting Standard -----(details)----- (refer Management Responsibility Paragraph).
On the basis of written representations received from the Directors and taken on record by the Board of Directors, we report that none of the Directors is disqualified as on 31st March, 2015 from being appointed as a Director in terms of under sub-section (2) of Section 164 of the Companies Act, 2013.
In our opinion, the company has adequate internal financial controls system in place and the operating effectiveness of such controls
As required by the Companies (Audit and Auditors) Rules, 2014 issued by the Central Government of India in terms of clause (j) of sub-section (3) of section 143 of the Act, we report that:
The company has disclosed the impact, if any, of pending litigations on its financial position in its financial statements
The company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts.
In our opinion, the company has not delayed, anytime during the year under audit, in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company 62

63. Requirements of Section 143(3):
SA-700
Audit Report – Companies Act, 2013
Requirements of Section 143(3):
Key changes :
Internal Financial Controls: Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls
Such other matters as may be prescribed.
(Refer Companies (Audit and Auditors) Rules, 2014
Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement;
Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts;
Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company. 63

64. Requirements of Section 143(11):
SA-700
Audit Report – Companies Act, 2013
Requirements of Section 143(11):
The Central Government may, in consultation with the National Financial Reporting Authority (NFRA), direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.
Companies (Auditors’ Report) Order, 2016 64

65. Requirements of Section 143(12):
SA-700
Audit Report – Companies Act, 2013
Requirements of Section 143(12):
Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
Guidance note on Fraud Reporting – March 2, 2015
The Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India has issued the Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013. 65

66. 3
Audit Report - Internal Financial Controls “Section 143 (3) (i)” of the Companies Act 2013 66

67. Presentation Overview :
Background
Application Guidance
IFC Audit Plan
Reporting 67

68. 1
Background 68

69. Background - Internal Financial Controls
AREA
PROVISIONS UNDER THE NEW COMPANIES ACT 2013
DEFINING IFC (NEW COMPANIES ACT 2013)
“Internal Financial Controls” (‘IFC’) has been defined in the New Companies Act 2013 Section 134 (5) (e), as to mean policies and procedures adopted by the company for ensuring:
The orderly and efficient conduct of its business
The safeguarding of assets
The prevention and detection of frauds and errors
The accuracy and completeness of the accounting records
The timely preparation of reliable financial information
DEFINING ICFR
(GUIDANCE NOTE ISSUED BY ICAI)
A company's Internal Financial Controls over Financial Reporting (‘ICFR’) includes those policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company;
provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements 69

70. SA-700
Components of IFC:
Procurement - All material receipts are accurately accounted for at month end
Sales - Sales realisation is correctly recorded in the financial statements
IFC
Internal Controls over Financial Reporting (‘ICFR’)
Fraud Prevention Controls
Operational Controls
Procurement - Procurement plan is validated to prevent excess / short procurement
Sales - Discount on Sale is offered as per DOA and adherence to DOA is monitored
Procurement - Vendor selection process is robust to eliminate bias
Sales - Access controls to ensure authorised change in price master 70

71. 22
Application Guidance 71

72. Guidance Note: Overview
SA-700
Guidance Note: Overview
Substantially similar to US PCAOB Auditing Standard (AS) 5, An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements.
The Guidance Note covers the following:
reporting on internal financial controls under the Companies Act 2013
essential components of internal controls
technical guidance on audit of Internal Financial Controls
implementation guidance on audit of Internal Financial Controls
illustrative list of risk of material misstatement
related control objectives and control activities for several processes
standard template for testing controls 72

73. Guidance Note: Key Highlights
SA-700
Guidance Note: Key Highlights
Reporting on management assessment
Auditors are not required to report on the management's assessment of effectiveness on internal financial controls. As a result, reporting by auditors will be an independent assessment on the adequacy and effectiveness of the company's internal financial controls.
Reporting on Interim financial statements
The Guidance Note also clarifies that reporting on internal financial controls will not be applicable with respect to interim financial statements, such as quarterly or half-yearly financial statement
Reporting on Consolidated Financial Statements (‘CFS’)
The Guidance Note has clarified by stating that reporting on the adequacy and operating effectiveness of IFC would apply even in the case of CFS. 73

74. 32
ICFR Audit Plan 74

75. ICFR: audit plan – Top Down Approach
Identifying Entity Level Controls
Identifying significant financial reporting elements (accounts or disclosures) basis materiality determined
Identifying the mega processes and sub-processes for the significant accounts or disclosures
Identifying material financial statement risk within these accounts or disclosures for each sub-process
Identifying and observing the design effectiveness of the entity level controls which would address these risks
Identifying the ‘As-is’ process and controls; and observing the design effectiveness of the activity level controls which would address these risks
Testing the Operating Effectiveness of entity level and activity level controls 75

76. Illustrative ELC 76 Code of Conduct Whistle Blower Policy
Board approved Delegation of Authority
Risk Management Policy
Budget or Annual Operating Plan
Business Continuity Plan
Disaster Recovery Plan
Organization Structure, Roles and Responsibilities including job descriptions, delegation of power
Policy related to related party transactions
Significant Accounting Policies
Anti-Fraud Policy
Information Security Policy 76

77. Characteristics of Smaller, Less Complex Entities
Factors indicative of less complex operations include:
Fewer business lines
Less complex business processes and financial reporting systems (for example, straightforward or uncomplicated transactions)
More centralized accounting functions (for example: concentration of ownership and management in a small number of individuals)
Extensive involvement by the owners and senior management in the day-to-day activities of the business
Fewer levels of management, each with a wide span of control (for example, person responsible for purchases of inventory is also responsible to making accounting entries.) 77

78. ELC for Smaller, Less Complex Entities
ELC Components
Ideal evidences of control implementation
Possible evidences of control implementation
Control Environment
Code of Conduct and other policies communicated and acknowledged
Whistle-blowing system
Job descriptions, flowcharts and system access clearly define the roles and responsibilities
System access rights for payment approvals
Management and the board of directors, demonstrate the importance of integrity and ethical values through their directives, actions and behaviors
Observation that segregation of duties is appropriate
Management review of reporting packages demonstrating close involvement of management
Policy of double signatures
Risk Assessment
Formal documentation of management risk assessment – significance, likelihood of occurrence and actions
In-house internal audit department
Observed that management
Identifies changes in entity and environment
Assesses likelihood of occurrence and significance of changes
Takes actions to design and implement control activities
This includes observation of process followed in response to a recent change. 78

79. ELC for Smaller, Less Complex Entities
ELC Components
Ideal evidences of control implementation
Possible evidences of control implementation
Information & Communication
Flowcharts / narrative descriptions to determine that business processes and information systems are in place
IT function has appropriate number of people with requisite skills
Minutes of meeting determine communication with users outside the financial reporting function.
Documents to determine that the controls over the reliability of the internal information are performed
Monitoring of Controls
Mechanism in place for capturing, reporting and addressing identified gaps and deficiencies in Internal Control
Performance of key reconciliations
Performance of periodic asset counts
Additional supervisory reviews performed
Management is receptive to recommendations from external auditors 79

80. Identification of Significant Accounts
Identify significant accounts and disclosures and their relevant assertions (i.e. financial statement assertions that have a reasonable possibility of containing a misstatement)
To identify significant accounts and disclosures and their relevant assertions, the auditor should evaluate the qualitative and quantitative risk factors related to the financial statement line items and disclosures
Factors to be considered:
Size and composition of the account;
Susceptibility to misstatement due to errors or fraud;
Volume of activity, complexity, and homogeneity of the individual transactions processed through the account or reflected in the disclosure;
Nature of the account or disclosure;
Accounting and reporting complexities associated with the account or disclosure;
Exposure to losses in the account;
Possibility of significant contingent liabilities arising from the activities reflected in the account or disclosure;
Existence of related party transactions in the account; and
Changes from the prior period in account or disclosure characteristics. 80

81. Illustration - Identification of Significant Accounts
Description
Amount
Scoped in
Consideration
Process name
Share capital
10,00,000
Yes
Quantitative
Finance & Accounts
Long-term borrowings
85,04,400
Other long term liabilities
9,50,000
Long-term provisions
Provision for taxation (net of advance tax)
19,25,000
Short-term borrowings
1,11,00,250
Trade payables
75,02,145
Procurement to Pay (including inventory)
Other current liabilities
Income received in advance
Order to Cash
Short-term provisions
75,33,000
Fixed assets
Tangible assets
1,93,01,000
Capital work-in-progress
1,25,000 No
Non-current investments
2,30,01,225
Long-term loans and advances
Loans and advances to related parties
15,00,128
Qualitative
Current investments
1,50,000
Inventories
1,23,56,857
Trade receivables
55,90,000
Cash and bank balances
9,51,334
Short-term loans and advances
2,13,532
Revenue from operations (gross)
9,15,12,321
Other income
Other non-operating income
91,23,100
Cost of materials consumed
5,03,31,776
Purchases of traded goods
33,55,451
Changes in inventories of finished goods, work-in-progress and traded goods
12,31,510
Employee benefit expenses
75,43,120
HR and Payroll
Finance costs
32,10,010
Depreciation and amortisation expense
25,12,311
Other expenses
Power and fuel
10,10,523
Rent
12,30,010
Repairs and maintenance
- Plant and equipment
83,422
- Others
9,25,915
Legal and professional
26,53,405
Payments to auditors
5,65,000
Miscellaneous expenses
5,43,345
Materiality – Rs 631,395 81

82. Mega Processes and Sub-Processes
Order to Cash
Sales Pricing and Approval process
Invoice Generation and Dispatch
Revenue Recognition
Rebates and Discounts
Collections
Dr/Cr Notes and Adjustment
Customer Account Reconciliation
Bad Debt Provision and Write Off
Procurement to Pay
(including inventory)
Purchase Requisitioning & Ordering
Vendor & Supplier Contract Management
Receipt of goods and services (Including Rejections & Returns)
Invoice Processing and Accounts Payable
Disbursement to Vendors and Suppliers
Vendor & Supplier Account Reconciliation / Balance Confirmation
Physical Verification and Adjustments
Obsolete / Damaged Inventory and Inventory Write-off 82

83. Mega Processes and Sub-Processes
HR and Payroll
Leave & Attendance Management
Payroll Processing
Statutory compliances - PF, ESI, TDS
Full and Final Settlement
Contract Labour Compliance and Management
Finance & Accounts
Expense Accounting and Approvals
Book Closure and reconciliations/Provisioning and Disclosures
Insurance Management and Premium Payment / Claims
Fixed Assets - Receipt & Capitalisation
Depreciation on fixed assets
Physical Verification and Adjustments
Loans and Advances
Security Deposits and Bank Guarantees
Cash and Bank Management
Term Loans and Finance Charges
Tax and Statutory Payments
Reporting, Consolidation and MIS 83

84. ICFR: Understand process flow of transaction
Step 1 - Identify and understand key processes relevant to the financial reporting (including how these transactions are initiated, authorised, processed, and recorded)
Step 2 - Identify points of material misstatement including one due to fraud
Step 3 - Identify the controls that management has implemented to address these potential misstatements
Step 4 - Select key controls to test to mitigate the risk
Note: Understanding process flow of a transaction provides foundation for the top-down, risk based evaluation of internal financial control over financial reporting.
Example processes:
Testing
Mega Process: HR and Payroll
Sub-processes:
Leave and attendance management
Payroll Processing
Significant account balance – Employee benefit expenses 84

85. HR and Payroll: Process flow
WCGW : HR-1
WCGW : HR-2
WCGW : HR-3
WCGW : HR-4 85

86. Process Narrative 86 Attendance and Leave Management:
Company follows monthly cycle of 26 day of the last calendar month to 25 day of current calendar month
Attendance data, late coming, overtime and other inputs are provided by admin to HR Executive
HR Executive, based on admin data, prepares the consolidated input data sheet. Input data sheet is approved by HR head and forwarded to payroll consultant (HR01)
Payroll Processing:
The new joinee data with the salary structure are provided to the payroll consultant along with input data
The data is forwarded via to a specified id of external payroll consultant.
Payroll consultant process the salary as per the company policy including salary calculation, PF calculations and TDS calculations
Payroll consultant submits the processed sheet to HR Executive and HR Head in excel format
HR Executive verifies the salary sheet provided by payroll consultant with employee master. In case any change is required in the payroll sheet, HR Executive confirms to payroll consultant.
HR Executive finalizes the payroll sheet and forwards it to HR head for approval (HR02)
HR head verifies payroll sheet and confirms to the payroll consultant for generation of final payroll sheet.
Payroll consultant sends final payroll sheet to HR Executive & HR Head for disbursement of salary.
HR team maintains the bank account detail of each employee linked to its employee code
HR Executive will link the bank account number to the processed final salary sheet received from the payroll consultant
Finance resource creates the csv file for bank upload on HR system and uploads the data on Bank Website (HR03)
Finance controller verifies the total amount uploaded on Bank website with the total amount confirmed by HR Head through mail and approves the payment on Bank website.
Second signatory approves the payment on Bank website (HR04)
Salary is processed and credited post approval 86

87. Illustrative Risk Control Matrix87

88. ICFR: Assessing design effectiveness of controls
Auditor should determine whether the company's controls:
operated as prescribed
by persons possessing the necessary authority and competence
to perform the control effectively and satisfy the company's control objectives
effectively prevent or detect errors or fraud that result in material misstatements in the financial statements.
Auditor may assess the design of the control by performing Walkthrough.
Walkthrough can be performed by:
Inquiry of appropriate personnel
Observation of Company's operations
Inspection of relevant documents
Re-performance of controls 88

89. ICFR: Design effectiveness of controls - Example
Particulars
Description
Significant Account balance
Employee benefit expense
Relevant Assertion
Accuracy and Completeness
Reasonably possible risk identified
Salary is incorrectly calculated and paid to employees
Control identified
Salary sheet, received from vendor is approved by HR Head post verification of HR executive 89

90. ICFR: Design effectiveness of controls - Example
Particulars
Description
Control Tested through
Inquiry of appropriate personnel and
Inspection of relevant documents
Testing Performed
Sample selected: December 2015
Document No:
Control: Payroll consultant process the salary as per the company policy and submits the processed sheet to HR Executive and HR Head. HR Executive verifies the salary sheet provided by payroll consultant with employee master and send to HR Head for approval.
Evidences verified:
Signoff of HR Head on the salary sheet for the month of December 2015.
HR Head reviewed the completeness and accuracy of salary computation. He did not note any exception.
The file was then approved by HR Head. Subsequent to the approval, ensured that the appropriate salary disbursement was done and recorded in the books.
Evaluation
Basis the above testing done, the design of control was evaluated as ‘Effective’ 90

91. ICFR: Test the operating effectiveness of controls
Testing operating effectiveness involves following steps:
Identify controls to test (key controls)
Determine a testing strategy
Design testing procedures
Perform control tests and evaluating the impact of any deviations found
Aggregate such deficiencies and evaluate the impact
Communicate the deficiencies to those charged with governance and management as applicable
Timing of test of controls
The auditor’s reporting on the adequacy and operating effectiveness of company’s internal financial control systems has to be as at the balance sheet date. Although, the extent of testing at or near the balance sheet date may be higher, the auditor should test the internal financial controls during the financial year under audit.
Extent of test of controls - No of samples to test the design & operating effectiveness of ICFR
Control frequency
Lower Risk
Higher Risk
Annual 1
Quarterly 2
Monthly 3
Weekly 5 8
Daily 15 25
Recurring manual control 40 91

92. Alternative documentation for Process / Controls
Larger companies with complex operations are more likely to have formal documentation of their processes and controls, such as in-depth policy manuals and systems flowcharts of processes. In a smaller, less complex company, documentation of processes and controls might take a variety of forms.
Examples of other documentation that may be considered for obtaining understanding of the entity’s process level control environment:
Internal Guidelines/Circulars/Memorandums relating to good practices/rules issued for an orderly and efficient conduct of business in their areas of operation.
Documentation prepared by the Company certification under ISO Standards of Quality
Policy Manuals providing set of policies, rules and guidelines adopted by a company
Period closure accounting adjustments circulars/guidelines
Internal departmental documents prepared by a department for its functioning and standardization of the processes
Relevant extracts of Management/Internal Audit/Review Reports
Checklists used may provide factors or points to be considered while carrying out an activity/ process
Alternate sources of audit evidence to evaluate whether the control is in place and operating effectively could include:
Inquiries of the senior manager understand what exactly is done in the review including activities performed including the frequency, nature, timing, and level of precision of the review.
Corroborative inquiries with the accountant to confirm the understanding obtained from the senior manager
Inspecting copies of the documentation supporting the review of senior manager
Observation that the results of the financial statement audit procedures did not identify likely misstatements. 92

93. 42
Reporting 93

94. ICFR: Key definitions
Deficiency Deficiency in internal financial controls over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Significant deficiency A significant deficiency is a deficiency, or a combination of deficiencies, in internal financial controls over financial reporting that is important enough to merit attention of those charged with governance since there is a reasonable possibility that a misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weakness A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. 94

95. Evaluating deficiencies
Management must evaluate the severity of each control deficiencies that comes to their attention.
Determine whether deficiencies, individually or in combination, are material weakness. Factors to be considered include
Likelihood that the deficiency will result in a financial misstatement
Magnitude of such outcome
Evaluate the effect of compensating controls when determining whether a control deficiency or combination of deficiencies is a material weakness
Attempt to remedy deficiencies and test remediated controls
Control deficiencies that are determined to be a material weakness must be disclosed in management’s annual report on its assessment of the effectiveness of ICFR. 95

96. Evaluating deficiencies
Compensating controls
Balancing of weak controls in a process with the strong controls within the same process.
reduce the severity of the deficiency but not eliminate the deficiency.
Example: Weak manual controls are compensated by strong automated controls or vice versa
Complimentary controls
These controls enhance the effectiveness of two or more controls
Example: Manual controls are complimented by automated controls and vice versa. 96

97. Illustrative list of compensating controls
Deficiency in Internal Control
Compensating control
Invoices could be introduced into the accounting systems which had not been approved
Management authorize all cheques. Documentation is inspected if the nature of the transaction is unknown to the cheque signatory
Invoices are not evidenced/ cancelled to confirm payment and therefore could be paid twice
Material over-payments would be identified in the purchase ledger. For instance by scanning the aged creditors report for debit balances.
In addition (also if invoices were to be processed twice), material duplicate transactions would be highlighted by a review of the income statement performed as part of the management accounts review.
The person responsible for raising cheques is also responsible for entering them in the accounting records. Fraudulent payments could be made
Over-payments would be identified (if material) in a review of the accounts and review by cheque signatories.
The person responsible for processing the payroll is also responsible for updating the standing data
The payroll is reviewed to ensure:
- totals appear reasonable
individual amounts paid look reasonable
Any significant misstatements arising as a result of fraud would be detected by management, given the size and complexity of the organisation. 97

98. Reporting Considerations
Single period for the internal control audit (never comparative).
The modified audit opinion on internal financial controls over financial reporting may or may not affect the type of audit opinion on financial statement audit.
Particulars
Effects on Financial Statements
Material and Pervasive
Material but not pervasive
Material weakness identified
Adverse
Qualified
Scope Limitation
Disclaimer 98

99. Reporting Considerations (continued)
Whether it is mandatory to obtain separate engagement letter and management representation in respect of audit of ICFR ?
As required by Standards on Auditing (SA) 210 Agreeing the Terms of Audit Engagements and Standards on Auditing (SA) 580 Written Representation, auditor obtains engagement letter and letter of representation respectively for purpose of financial statement audit.
Guidance Note does not mandate obtaining a separate engagement letter and written representation for audit of ICFR and thus an auditor may obtain a combine engagement letter and written representation.
The combined engagement letter and written representation should include all necessary elements in respect to audit of internal financial control over financial reporting and audit of financial statements. 99

100. Reporting Considerations (continued)
Whether opinion on ICFR can be included in the audit report on the financial statements?
Paragraph 158 of the Guidance Note states that "The auditor may issue separate reports on the company's financial statements and on internal financial controls over financial reporting." The illustrative reports provided in the Guidance Note in fact include reporting on ICFR as annexure to the main audit report which is not a separate standalone report.
Alternatively, a combined report may also be issued where reporting on ICFR is included in the body of the main audit report.
The illustrative format of the combined audit report is as below:
Auditor’s Responsibility
“Our responsibility is to express an opinion on these standalone financial statements based on our audit and to express an opinion on the Company’s internal financial controls over financial reporting based on the audit.
We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act and the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting.
In our opinion, the Company has, in all material respects, an adequate internal financial controls system over financial reporting and such internal financial controls over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India.”
100

101. Reporting Considerations (continued)
Disclaimer of Opinion
Scenario 1 – Framework for internal financial control over financial reporting not established but does not impact the audit opinion on financial statements
According to the information and explanation given to us, the Company has not established its internal financial control over financial reporting on criteria based on or considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India. Because of this reason, we are unable to obtain sufficient appropriate audit evidence to provide a basis for my / our opinion whether the Company had adequate internal financial controls over financial reporting and whether such internal financial controls were operating effectively as at March 31, 20X1.
I / We have considered the disclaimer reported above in determining the nature, timing, and extent of audit tests applied in my / our audit of the standalone financial statements of the Company, and the disclaimer does not affect my / our opinion on the standalone financial statements of the Company.
101

102. Reporting Considerations (continued)
Disclaimer of Opinion
Scenario 2 – Auditor unable to obtain sufficient appropriate audit evidence on internal financial controls over financial reporting but does not impact audit opinion on the financial statements
The system of internal financial controls over financial reporting with regard to one of the significant branches of the Company at _____ were not made available to me / us to enable me / us to determine if the Company has established adequate internal financial control over financial reporting at the aforesaid branch and whether such internal financial controls were operating effectively as at March 31, 20X1.
I / We have considered the disclaimer reported above in determining the nature, timing, and extent of audit tests applied in my / our audit of the financial statements of the Company, and the disclaimer does not affect my / our opinion on the financial statements of the Company.
102

103. Reporting Considerations (continued)
Disclaimer of Opinion
Scenario 3 – Auditor unable to obtain sufficient appropriate audit evidence on internal financial controls over financial reporting and impacting audit opinion on the financial statements
The system of internal financial controls over financial reporting with regard to the Company were not made available to me / us to enable me / us to determine if the Company has established adequate internal financial control over financial reporting and whether such internal financial controls were operating effectively as at March 31, 20X1.
103

104. Key Auditor’s notes
Auditor should ensure that identification of key controls (relevance to the risk of material misstatement) is appropriate – not too many or in-adequate
Perform procedures prior to March 31st to ensure that for any weakness identified management is given an opportunity to mitigate by the balance sheet date
Assessment of impact on financial statement audit is critical part of conclusion
Do not ignore the role of Information technology in performing test of controls – adequacy or lack of it
Modify the audit approach from substantive procedures to test of controls approach
104

105. SA-700
CARO-2016
105

106. 106