1. Audit Reporting for companies
Himanshu Kishnadwala
20 January 2018
CNK

2. Agenda
Audit Reporting for Companies – Updates and some commonly observed errors
Appointment, Disqualifications, Responsibilties
Audit Reporting provisions under Companies Act, 2013
Relevant Standards on Auditing (SAs) under series
SA 700, 701, 705, 706 – for FS ending for periods upto 31st March 2018
SA 710, 720 – in all cases
QRB observations on Audit Reports
SA 700 (revised), 701, 705 (revised), 706(revised) – for reports of FS for periods beginning on or after 1st April 2018

3. Audit Reporting for Companies
The Companies Act lays down various provisions for reporting by statutory auditors
Sec 143 of Companies Act, 2013 – sub sections 1 to 15 lay down the reporting requirements
The actual format in which reporting is to be done is governed by the applicable Standards on Auditing (SAs) issued by ICAI (NFRA as and when notified)
SAs are primarily based on ISAs with very few modifications

4. Appointment, Disqualifications, Responsibilities as per Companies Act, 2013
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5. Companies Act requirements for Auditors appointment, etc. (sec
Appointment of auditors
Appointment to be done once for 5 years – requirement for ratification to be done every year removed by Companies (Amendment) Act 2017
Mandatory retirement after 5 / 10 years for individuals / firms
For considering the tenure prior to 1st April 2014, tenure of other firms operating under same network (i.e. under same brand, trade name or common control) to be also considered
First appointment of auditors – to be done by BoD within 30 days – in such case rotation maybe after years
No rotation for Small Companies and OPCs

6. Appointment of Auditors…
Rotation – Rules lay down retrospective applicability as under:
Applicable to all Listed Companies
For Unlisted Public Companies if share capital >= 10 crores
For Private Companies if share capital >= 20 crores
For other companies with capital below above limits if public borrowings (from FIs, banks, public deposits) >= 50 crores
Cooling period for 5 years
Transition provision of 3 years (completed in March 2017)
As per SQC1, rotation of audit engagement partner needs to be done every 7 years (some exceptions for proprietorships with conditions)

7. Eligibility and Qualification Of Auditors
Chartered Accountant in Practice
Firm / LLP where majority of partners are practicing in India are qualified as Cas
The following are not eligible for appointment:
Financial Interest Test
A person who or his relative or partner –
Is holding any security in the company / subsidiary / holding / associate company in excess of (face value of Rs. 1 lakh – corrective action within 60 days)
Is indebted or has given guarantee to the company / subsidiary / holding / associate in excess of Rs. 1 lakh

8. Eligibility and Qualification Of Auditors …
Business Relationship Test
Disqualified if auditor has business relationship with company / subsidiary / holding / associate company
Such relationships will be construed as transaction for commercial purposes except:
Professional services permitted to be rendered by auditor under the Act or CA Act (incl. rules and regulations);
Commercial transactions in ordinary course of business at arms’ length price like a customer with those doing business of telecom, airlines, hospitals, hotels, etc.

9. Eligibility and Qualification Of Auditors …
Limit on number of Audits
Not to exceed 20 companies per partner
Limit applicable for Public Companies and Private Companies having share capital > 100 crores
Do the limits apply overall for the firm i.e. in a firm of 3 partners, can 1 partner sign 60 audit reports?

10. Disqualification Of Auditors – Prohibited Services
Besides audit, only such services can be provided as approved by Board of Directors or Audit Committee.
The following services are however specifically not permitted:
Accounting and book keeping services;
Internal audit;
Design / implementation of any financial information system;
Actuarial services,
Investment advisory / banking services;
Outsourced financial services and
Management services,
Other kind of services to be prescribed

11. Disqualification Of Auditors – Prohibited Services…
Restrictions apply to Audit firm, its partners, its parent, subsidiary or associate company or any other entity in which the firm or any of its partner has significant influence / control or whose name / trade name / brand is used by the firm or any of its partners.
IFAC Code of Ethics defines ‘management services’ as ‘assistance for carrying out such services for the company which are the responsibilities of the management’.
Issue: Can Auditor provide Tax representation services?

12. Auditor’s Rights
Access to books of accounts kept at registered office and at any other place in India.
Compulsory attendance of Auditor at every AGM
Auditor of holding company shall also have the right of access to the subsidiaries’ books of accounts so far as it relates to the consolidation. No such provision currently.

13. Remuneration of Auditors
For 1st year to be decided by BoD
Subsequently, to be decided at AGM of Company
Expenses incurred by auditor in conduct of audit to be additional
Any facility extended to him by company for conduct of audit also additional
For other services rendered (as permissible), no approval at AGM
Resolution for auditors’ remuneration should be very explicit and clear – else the fees paid can amount to an advance / loan and subsequent disqualification

14. Removal of Auditors (Sec. 140)
Removal of Auditor before the expiry of the term
Special Resolution of the Company and
Prior approval of Central government.
Auditor to intimate to company and file in prescribed form with the Registrar within 30 days indicating reasons and facts.
Resignation of Auditor
Special Notice is required for resolution
To send a copy of special notice to Auditor.
Retiring auditor’s right to make representation which should be sent along with notice to the members or read out in the meeting.
Appointing as auditor a person other than a retiring auditor

15. Sec 146: Auditor to attend AGM
As per above section, notice for any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.
This applies also to private limited companies
To avoid this, preferable to include in Engagement Letter that auditor is exempted from attending general meetings.

16. Mandatory Joint Audits: FDI Policy announced on 5th January 2018 (extract)
Prohibition of restrictive conditions regarding audit firms:
The extant FDI policy does not have any provisions in respect of specification of auditors that can be appointed by the Indian investee companies receiving foreign investments.
It has been decided to provide in the FDI policy that wherever the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company, then audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network
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17. Audit Reporting provisions as per Companies Act, 2013
CNK

18. Audit Reporting under Companies Act, 2013
Section 143 is the relevant section
Section 143 consists of 15 sub sections
For sub sections 143(1), 143(3)(f) and 143(3)(h) reporting only if there are adverse or negative observations
For other sections reporting in all cases (i.e. even if no adverse observations)
Reporting under section 143 also applies to Audit Report on CFS

19. Reporting under section 143(1)
To make inquiries and report on following matters if answer is in negative or adverse:
whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;
whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the co;
where the company not being an investment / banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased;
(d) whether loans and advances made by the company have been shown as deposits;
CNK

20. Reporting under section 143(1) …
whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading:
Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.
CNK

21. Reporting under section 143(2)
The auditor shall make a report to the members of the company on the accounts examined by him and on every FS which are required by or under this Act to be laid before the company in general meeting and
The report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) * and to the best of his information and knowledge, the said accounts,
FS give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and other matters as may be prescribed **
* refers to CARO ** none so far
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22. Reporting under section 143(3)
The auditor’s report shall also state—
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;
whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
whether the report on the accounts of any branch office of the company audited u/ss (8) by a person other than the company’s auditor has been sent to him and the manner in which he has dealt with it in preparing his report;
whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
whether, in his opinion, the FS comply with the accounting standards;
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23. Reporting under section 143(3) …
the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
As per ICAI GN:
Such observations / comments would ordinarily lead to Modification or an EoM in the AR on FS;
The phrase 'observations / comments' should be construed to have same meaning as referring to modification or EoM in the AR,
The 'observations / comments' in AR cannot have any adverse effect on the functioning of the company, but it might contain matters which might have an adverse effect
Act does not specify meaning of the phrase “adverse effect on functioning of the company’ – hence cannot be interpreted to cover all events (like revocation of license), but only events that may impact the FS under audit
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24. Reporting under section 143(3) …
143(3)(f) … As per ICAI GN …
Because of inclusion of (f), there is no change in scope of audit and auditor’s role as contemplated under SAs and other ICAI pronouncements;
However auditor has to now evaluate if subject matters leading to modification or EoM in AR may have an adverse effect on functioning of the company;
In case of matters that are pervasive in nature, can significantly impact the operations of the company e.g. EoM on ‘Going Concern” assumption.
In such cases, the Auditor should report under 143(3)f)
(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
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25. Reporting under section 143(3) …
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; (ICAI GN issued)
As per ICAI GN:
Matters that cause modification in AR can have consequential effects (or possible effects) on books maintained and other matters connected therewith;
Sec 128 requires every company to prepare and keep its books of account and FS that give a ‘true and fair’ view;
Sec 129(1) requires that FS should comply with notified AS;
Sec 2(13) defines 'books of account';
143(3)(b) also requires reporting on 'books of account'
Auditor needs to report under this clause any matter of modification in AR, if it can have effect on ‘books of account’ maintained by company;
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26. Reporting under section 143(3) …
(i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; [IFC defined in 134(5)]
As per sec 134(5)(e), “ internal financial controls” means the policies and procedures adopted by the company for:
ensuring the orderly and efficient conduct of its business, including
adherence to company’s policies,
the safeguarding of its assets,
the prevention and detection of frauds and errors,
the accuracy and completeness of accounting records, and
the timely preparation of reliable financial information.
CNK

27. Reporting under section 143(3) …
Definition as per 134(5)(e) is very wide since it related to reporting by directors
ICAI however, in its GN on “Reporting under IFC” restricted the responsibility of auditors to only those controls related to FS
Companies Amendment Act 2017 has amended sec 143(3) to now require auditors to state “whether the company has adequate internal financial controls in place with reference to financial statements and the operating effectiveness of such controls”
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28. What is ‘Internal Controls over Financial Reporting’? (ICFR)
ICFR is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and preparation of FS for external purposes in accordance with GAAP and includes those policies and procedures that –
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of FS in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the FS

29. Internal Financial Controls thus means …
‘IFC’ means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
Internal Control over Financial Reporting (ICFR)
Operational Controls
Fraud Prevention
Internal Financial Controls

30. Reporting under section 143(3) …
(j) such other matters as may be prescribed (as under)
Other matters to be included in AReport u/s 143(3): Rule 11
Whether company has disclosed impact, if any, of pending litigations on its financial position in its FS.
Whether company has provided for material forseeable losses, if any, on long term contracts including derivative contracts.
Whether there has been any delay in in transferring amounts to IEPF.
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31. Reporting under section 143(3) …
Other matters to be included in auditors report u/s 143(3): Rule 11
Whether company has disclosed impact, if any, of pending litigations on its financial position in its FS.
To be cross referred to Notes in FS – if no such note then separate annexure for the same
Whether show-cause notice can be construed as litigation?
AS 29 chart to be followed
Whether company has provided for material forseeable losses, if any, on long term contracts including derivative contracts.
Can become difficult for auditor to comment
To consider all long term contracts
Whether there has been any delay in in transferring amounts to IEPF
Factual reporting
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32. Reporting under section 143(4) to (10)
143(4): Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor.
Requirement of highlighting adverse observations/comments in audit report in thick/bold type or italics omitted.
Sec 143(5) to 143(7): Reporting to C&AG by auditors of PSUs
Similar to report issued u/s 619 of Companies Act, 1956
Additional reporting instructions from CAG
Sec 143(8): Reporting by Branch Auditors to main auditor
same responsibility as per sec 143(1) to 143(4), 143(12).
Sec 143(9) / (10): Auditor to comply with Auditing Standards
To be notified by NFRA – till that time, Standards on Auditing (SAs) issued by ICAI shall be deemed to be auditing standards.
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33. Reporting under section 143(11)
Statement to be included in report on matters specified
Companies (Auditor's Report) Order, 2016 applicable for FY commencing on or after (CARO, 2016)
Applies to every company including a foreign company, except:
banking company
insurance company
company licensed to operate under section 8 (with charitable objects) of the Companies Act;
One Person Company and a small company
private limited company (not being subsidiary or holding co of a public co)which has:
Paid up capital and reserves
Not > Rs. 1 crore on BS date AND
Loan o/s from any bank/FI
Not > Rs. 1 crore at any point of time AND
Turnover
Not > Rs. 10 crores
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34. Reporting under section 143(11) … CARO 2016…
Reporting on 16 items – some important reporting clauses:
Fixed Asset related
Loans, etc. to related parties
Whether any loans covered u/s 185 / 186
Deposits u/s 73
Timely payment of PF dues, etc.
Advance Tax, GST shortfall may need to be reported
Default in repayment of loans to FIs, banks, etc.
Fraud
Managerial remuneration u/s 197
Related party transactions u/s 177 /188
Whether required to be registered with RBI?
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35. Audit reporting under Companies Act, 2013…
Sec 143(12) - Reporting of frauds
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 CG within the time prescribed.
In case of frauds involving amounts lesser than amount specified ** he shall report to the Audit Committee or Board
Frauds reported only to Audit Committee and Board to be disclosed in Directors’ Report
** Rs. 1 crore

36. Reporting under section 143(12) …
Reporting of frauds …: Procedure prescribed as per Rule 13
Auditor to forward his report to Board / Audit committee, immediately after he comes to know of fraud, seeking their reply or observations within 45 days'
On receipt of such reply / observations auditor to forward his report and such reply / observation along with his comments to CG within 15 days;
In case the auditor fails to get any reply / observations from the Board / Audit committee within 45 days, he shall forward his report to the CG along with a note containing details of his report that was earlier forwarded to the Board / Audit Committee of which he failed to receive any reply within the stipulated time;
The report shall be sent to the Secretary, MCA in a sealed cover by RPAD OR by Speed Post followed by an in confirmation of the same.
The report shall be on the letter head of auditor containing postal and address with his sign, seal and membership number
The report shall be in the form as specified in Form ADT – 4

37. Reporting under section 143(12) …
Reporting of frauds…
ICAI has issued GN on "Reporting on Fraud u/s on 143(12)”
As per ICAI GN:
Frauds detected ‘in the course of performance of duties as an auditor’ – Implies in the course of performance of an audit as per the SAs
An Auditor has to consider the requirements of SAs to assess risk of fraud (SA 240)
Reporting is applicable only when an auditor has evidence that fraud exists
Scope of Sec 143(12) is restricted only to fraud by officers or employees of the company and does not include fraud by third parties such as vendors / customers.
To apply the Concept of Materiality

38. Reporting under section 143(12) …
ICAI GN … :
Auditor should also report in case of Corruption, Bribery, Money Laundering and Non-compliance with other Laws and Regulations
Persons Covered under Section 143(12) for fraud reporting.
U/s 447 fraud includes acts which affect the interest of the company or its stakeholders. However the auditor may not be able to detect such frauds unless financial effects of such acts are reflected in the books of account/FS of the company.
Persons
Covered
Not covered
Auditors appointed under other statutes (E.g. VAT/GST auditors, Tax Auditors) x
Internal Auditors
Branch Auditors

39. Reporting under section 143(12) …
Reporting of the fraud identified while performing other attest and permitted non-attest services.
If the auditor intends to use information obtained during the course of attest services while conducting statutory audit, then such instances of frauds become reportable u/s 143(12).
Reporting of the frauds detected by the management and already disclosed by the other person.
Auditor is responsible to report the instance of fraud if he is the first person to identify the same instance.
If the same has been reported earlier then the auditor is not required to report the same again. This also applies to fraud reported by the cost and secretarial auditors. If the auditor is dissatisfied and the management does not conduct additional procedures within 45 days then auditor has to evaluate whether he should report same to CG or not.

40. Fraud reporting under CARO, 2016 vis-a-vis Section 143(12)
Points
Clause (xii) of CARO, 2016
Section 143(12) Of Companies Act, 2013
Frauds on the company
To be reported by the auditor irrespective of whether committed by employees or officers or by third parties
To be reported by the auditor if committed by employees or officers
Frauds by the company
To be reported by the auditor
Not to be reported
Reporting by auditor to
Members of the company as part of auditor's report
Reporting to Central Government, not part of audit reporting to members

41. Fraud reporting under CARO, 2015 vis-a-vis Section 143(12)
Points
Clause (xii) of CARO, 2016
Section 143(12) Of Companies Act, 2013
Frauds detected by whom to be reported
Frauds noticed or reported (not necessarily by auditor) to be reported
Frauds detected by auditor in course of performance of duties to be reported
Materiality of frauds detected-whether relevant
No express provisions on materiality aspect.
Materiality affects speed and manner of reporting under section 143(12) and Rule 10.10
Companies in respect of which obligations cast on auditor
Obligations on auditors only in respect of companies to which CARO, 2016 is applicable
Obligations on auditors in respect of all companies

42. Audit reporting under Companies Act, 2013…
Sec 143(13) - No duty of auditor w.r.t. fraud reporting to be deemed as having been contravened, if it is done in good faith.
Sec 143(14) – Provisions u/s 143(12) shall mutatis mutandis apply to
Cost Accountant in practice
Company Secretary in practice
Sec 143(15) - If the auditor does not report the fraud committed or being committed, he shall be punishable with fine which shall be less than Rs. 1 lakhs but may extend to Rs. 25 lakhs.

43. Format of Independent Audit Report
AASB of ICAI has revised the illustrative formats of the Independent Auditors reports (from )
Illustration 1
Unmodified Opinion on Standalone FSs, Emphasis of Matter Paragraphs, Reporting on clause 143(3)(i) regarding internal financial controls (IFC) is required.
Will be added to Appendix to SA 700
Illustration 2
Unmodified Opinion on Standalone FSs, Emphasis of Matter Paragraphs, Reporting on clause 143(3)(i) regarding IFCs is not required.
Illustration 3
Qualified Opinion on Standalone FSs, Qualification is quantifiable, Reporting on clause 143(3)(i) regarding IFCs is not required.
Will be added to Appendix to SA 705
Illustration 4
Qualified Opinion on Standalone FSs, Qualification is not quantifiable, Reporting on clause 143(3)(i) regarding IFCs is not required.
Illustration 5
Adverse Opinion on Standalone FSs, Reporting on clause 143(3)(i) regarding IFCs is not required.
Illustration 6
Disclaimer of Opinion on Standalone FSs, Reporting on clause 143(3)(i) regarding IFCs is not required.

44. Format of Independent Audit Report…
Following new paras have been added:
Management’s Responsibility
Addition “This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent”
Auditor’s Responsibility
Addition “We have taken into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made thereunder’’

45. Format of Independent Audit Report…
Report on other Legal and Regulatory Requirements includes:
Reporting as required by sec 143 (3)
Where the company does not have any requirement to prepare consolidated FS under 2013 Act, the term ‘‘ Standalone financial statements”, wherever appearing, would be replaced by the term ‘‘financial statements”.

46. Reporting for CFS ICAI Announcement on 1st May 2015
Guidance to be drawn from formats of standalone financial statements (issued by ICAI in Dec 2014);
For reporting u/s 143(3) and 143(11), to consider observations and comments in the audit reports of the component auditors;
Include in their report or draw suitable reference to negative/adverse comments, if any, relating to the component as appearing in the component auditors report;
2 formats issued as Appendix to SA 700/705 to provide broad guidance for reports on CFS;
Reports on CFS normally contain an ‘Other Matters’ paragraph for those components whose audit is conducted by other auditors;
The draft reports indicate that for reporting u/s 143(11) i.e. clauses of CARO, only the subsidiaries, associates, etc. incorporated in India are to be included.
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47. Reporting for CFS …
Issues on Audit Reports on CFS: How to report u/s 143(3) on –
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 …
whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books
What is ‘books of account’ in context of CFS? In almost cases, CFS are prepared on worksheets and no separate books maintained
Reproduction of all modifications, EoM, OM paras, etc. in reports of subsidiaries can result in a v-e-r-y lengthy report on CFS

48. Audit Reporting provisions as per Standards on Auditing (SAs)
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49. How many Standards of Auditing are issued by ICAI?
Standards on Quality Control (SQCs) – SQC 1
SA 100- SA 199 Introductory Matters
SA 200-SA 299 General Principles and Responsibilities
SA 300- SA 499 Risk Assessment and Response to Assessed Risks
SA 500-SA 599 Audit Evidence
SA 600- SA 699 Using Work of Others
SA 700-SA 799 Audit Conclusions and Reporting
SA 800- SA 899 Specialized Areas
SREs 2000-SREs 2699 Standards on Review Engagements (SREs)
SAEs SAEs 3699 Standards on Assurance Engagements (SAEs)
SAEs 3000-SAEs 3399 Applicable to All Assurance Engagements
SAEs SAEs 3699 Subject Specific Standards
SRSs 4000-SRSs 4699 Standards on Related Services (SRSs)

50. Standards of Auditing related to Audit Reporting
Audit Conclusions and Reporting
SA 700, Forming an Opinion and Reporting on Financial Statements
SA 705, Modifications to the Opinion in the Independent Auditor’s Report
SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
SA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements
SA 720, The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements

51. Statutory Audit Reports
Clean
(700)
Modified (705)
Qualified (705)
Disclaimer (705)
Adverse (705)

52. Statutory Audit Reports …
Clean Report
(700)
Emphasis of Matter (706)
Other Matters (706)

53. Auditor’s Report Elements of Audit Report: Title Addressee
Introductory Paragraph
Management’s Responsibility for the FS
Auditor’s Responsibility
Auditor’s Opinion
Other Reporting Responsibilities
Signature of the Auditor
Date of Auditor’s Report
Place of Signature

54. QRB observations on Audit Reports
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55. What is the Quality Review Board?
MCA has powers u/s 28A of the Chartered Accountants Act, 1949 to constitute Quality Review Board (QRB)
Established by Parliament in 2007
Mandate of QRB is to:
Review quality of audit services provided by ICAI members;
Guide members to improve quality of audit of ICAI members
Recommendation to Council of ICAI for audit quality improvement
Report issued by QRB in October 2017 for audit findings for reviews conducted for FY

56. QRB Observations
Entities covered: 47 (34 listed and 13 other Public Interest Entities)
Audit firms reviewed: 64
Audit files reviewed: 74
Findings cover compliance with Standards of Auditing and applicable NACAS notified Accounting Standards

57. QRB Observations on SAs
SQC-1: Quality control framework: Key Takeaways
Improve implementation and documentation for various elements of the system of quality control as per SQC-1
Maintain policy and procedure to notify breaches of independence requirements
Provide eligibility and maintain objectivity of Engagement Quality Control Reviewer (EQCR)
Maintain staff appraisal policy
Maintain policies and procedures with regard to engagement performance, engagement documentation and archival process
Improve monitoring mechanism and take corrective action for any of the deficiency identified during inspection process and communicate to its partner

58. QRB Observations …
SA 210: Agreeing the terms of Audit Engagement: Key takeaways
Agree on terms of audit engagement with management
Cover all aspects of the objective and scope of audit, responsibilities of the management and auditors in the engagement letter;
Identify the applicable financial reporting framework in the engagement letter
Make reference to the expected form and content of reports to be issued
Engagement letter to be signed and dated within a reasonable time frame from the date of appointment

59. QRB Observations … SA 230: Audit Documentation: Key takeaways
Prepare audit documentation on timely basis duly recording who performed and reviewed audit work and date of completion and review.
Audit documentation should explain:
Nature, timing and extent of audit procedures performed to comply with SAs and legal / regulatory requirements
Results of audit procedures, audit evidence obtained
Significant matters arising during the audit, conclusions reached and significant professional judgements made

60. QRB Observations … SA 230: Audit Documentation: Key takeaways …
Document discussions of significant matters with management and TCWG
Put in place EQCR system and ensure compliance
Put in place education / training system with due consideration of experience of audit practitioners, scope of their audit engagements, newly adopted audit standards and other relevant factors
Comply with policies and procedures for assembly and archival of work papers within stipulated time

61. QRB Observations …
SA 240: Auditors’ Responsibilities relating to Fraud in an audit of financial statements: Key takeaways
Maintain professional skepticism throughout the audit period;
Make inquiries of management and others within the entity and not merely with the MD / CFO – (Inquiry should also be made with Chairman, Audit committee members, Board members, IA team, KMP and others);
Identify and sufficiently respond to significant risks such as revenue recognition, journal entries and related parties by adequately performing sufficient work in areas identified;
Review accounting estimates for biases and performing adequate work;
Review policies frequently to determine if the materiality policies are still appropriate in terms of the requirements of SAs

62. QRB Observations …
SA 300, 315, 320, 330 Risk assessment and response to assessed risks: Key takeaways
Perform risk assessment procedure to provide basis for identification and assessment of risks of material misstatement at the FS and assertion level
Obtain understanding of the nature of the entity, its operations, its ownership and governance structures, types of investments that entity is making and plans to make, including investments in special-purpose entities;
Obtain understanding of internal control relevant to audit;
Design and perform further audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level

63. QRB Observations …
SA 300, 315, 320, 330 Risk assessment and response to assessed risks: Key takeaways …
Include in the audit plan about the planned audit procedures and have appropriate audit responses that are required to be carried out so that the engagement complies with SAs;
Test IT related controls, IT generated reports and have appropriate planned procedures including changes to IT systems and have appropriate IT personnel on engagement;
Document the design and effectiveness of controls and performing appropriate test of controls to obtain sufficient appropriate audit evidence.

64. QRB Observations …
SA 500, 515, 510, 520, 530, 540, 550, 570, 580 Audit Evidence: Key takeaways
Design and perform audit procedures that are appropriate in the circumstances for obtaining sufficient appropriate audit evidence;
Maintain control over external confirmation requests while using external confirmation procedures;
Select items for the sample in such a way that each sampling unit in the population has a chance of selection;
Perform audit procedures to comprehensively understand related parties;

65. QRB Observations …
SA 500, 515, 510, 520, 530, 540, 550, 570, 580 Audit Evidence: Key takeaways …
Appropriately identify and assess risks of material misstatement in accounting estimates, and perform appropriate audit procedures to address such risks;
Perform analytical procedures during planning stage, audit performance and when forming overall conclusion as to whether FS are consistent with auditors’ understanding of entity;
Manitain documentation for the work performed.

66. QRB Observations … SA 700, 705, 706 Audit Reporting: Key takeaways
Form an opinion on FS based on evaluation of conclusions drawn from audit evidence obtained and express clearly that opinion through written report that also describes the basis for the opinion;
Obtain reasonable assurance about whether FS as a whole are free from material misstatement, whether due to fraud or error;
Modify opinion in auditors’ report and conclude based on audit evidence obtained that the FS as a whole are not free from material misstatement;

67. QRB Observations … SA 700, 705, 706 Audit Reporting: Key takeaways …
Have appropriate consultations within the firm for any modifications to the audit report and document such consultations as part of work papers;
Include an EoM para in auditors’ report to draw user’s attention to matter presented or disclosed in FS that in the auditors’ judgement is of such importance that it is fundamental to user’s understanding;
Obtain management representation before audit report is issued.

68. Some commonly observed errors in Audit reports
Modified vs. Clean Reports
Qualification vs. Disclaimer vs. Adverse opinion
EoM vs. Modified opinion
Modification or EoM should be self explanatory (should also refer to the appropriate note in FS)
In case of any modification in the AR, the portion on “Report on Other Legal and Regulatory Requirements” will also need to be appropriately modified
CARO Reporting should be specific (and not vague)
ICFR Reporting should be specific – cannot have EoM or OM but can be a modified report

69. Audit Reporting provisions as per SAs
For reports for periods beginning on or after 1st April 2018 onwards
CNK

70. Standards of Auditing related to Audit Reporting
Audit Conclusions and Reporting
Revised SA 700, Forming an Opinion and Reporting on FS
SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report – new SA
Revised SA 705, Modifications to the Opinion in the IAR
Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
SA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements
SA 720, The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements

71. Why Change the Auditor’s Report?
Continued relevance of audit
Improve audit quality and professional scepticism
Enhance preparer focus on key financial statement risk areas and disclosures
Enhance communicative value to users
Stimulate more robust auditor interactions and user engagement
Improve users’ understanding of what an audit is and what the auditor does

72. Key Features of the New Auditor’s Report
Audit Opinion - Required to be presented first
Key Audit Matters – Required for listed entities
Going Concern – Additional focus
Other Information – Enhanced work effort and new section
Responsibilities – For the audit; independence and ethical obligations
Listed entities: Name of engagement partner

73. Key Audit Matters (KAM): The Facts
What Are KAM?
KAM are defined as those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with TCWG.
When are KAM communicated?
Required for audits of financial statements of listed entities
Law or regulation may require KAM to be communicated (e.g., “public interest entities”, or public sector entities)
Auditor’s may voluntarily, or at the request of management or TCWG, communicate KAM

74. Initial Step in Determining KAM
Matters that were communicated with TCWG
Matters that required significant auditor attention
The auditor will always consider:
Areas of higher assessed risks of material misstatement or significant risks (i.e., risks requiring special audit consideration)
Significant auditor judgements relating to areas involving significant management judgement (e.g., complex accounting estimates)
Effect on the audit of significant events or transactions

75. Initial Step in Determining KAM
Considerations in determining matters of most significance include:
Nature and extent of communication with TCWG
Importance to intended users’ understanding of the FS
Nature and extent of audit effort needed to address
Nature of the underlying accounting policy, its complexity or subjectivity
Nature and materiality, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements due to fraud or error (if any)
Severity of any control deficiencies identified relevant to the matter (if any)
Nature and severity of difficulties in applying audit procedures, evaluating the results of those procedures, and obtaining relevant and reliable evidence
Step 2:
Matters that required significant auditor attention
Matters of most significance in the audit

76. The Description of KAM in the Auditor’s Report`
How addressed could include:
Aspects of the auditor’s response or approach
Brief overview of procedures performed
Indication of the outcome of the auditor’s procedures
Key observations with respect to the matter
The description of the KAM always includes:
Why the matter was considered to be a KAM
How the matter was addressed in the audit
Reference to the related disclosures, if any

77. The Description of KAM Considerations in describing KAM:
Entity- and audit- specific
Avoid standardized or overly technical language
Should not
Imply that the matter has not been appropriately resolved by the auditor in forming the opinion on the financial statements
Contain or imply discrete opinions on separate elements of the financial statements ( a “piecemeal opinion”)

78. KAM – Relationship to EOM and OM Paragraphs and Modified Opinions
Concepts of emphasis of matter (EOM) and other matter (OM) paragraphs are retained
EOM and OM paragraphs cannot be used as a substitute communicating a matter determined to be a KAM
New requirement to use the term “Emphasis of Matter” in the heading in the auditor’s report when an EOM paragraph is included
Matters that give rise to a modified opinion are, by their nature, KAM

79. Ex-RBI Governor’s speech at WIRC Regional Conference
WIRC Regional Conference December 2011: Challenges to the Accounting Profession – Some Reflections, by Dr. D Subbarao.
Competence
With the growing complexity of the financial sector and the emergence of new and sophisticated financial instruments, the knowledge base of the profession needs to keep pace with these emerging practices and innovations.
Globalization
Globalization implies that countries can no longer afford to remain isolated in so far as their operating and legal systems are concerned. For the profession, this gets reflected not merely in international accounting and auditing standards but also in a number of other areas like education, ethics, etc. It is not sufficient that the Institute merely responds to and adopts global standards. It should, in fact, go further and actively participate in the formulation of these standards.

80. Ex-RBI Governor’s speech …
Information Technology (IT) In the past, one of the main objectives of audit was ensuring the arithmetical accuracy of financial statements. With the advent of IT, this task has now been taken over by machines. This has both nudged and facilitated the profession to move up the value chain. The main task of the profession has now shifted to judgments of value, and to discharge this task, auditors have to demonstrate much higher levels of maturity, integrity, independence and balanced judgment. The development of these qualities will be a major challenge in the future. This has created both opportunities and challenges for auditors. Challenges come by way of lack of visible evidence, risk of undetected system errors and bugs and frauds hidden in a labyrinth of data. Opportunities come by way of increasing use of Computer Assisted Audit Tools (CAATs) to access databases beneath the accounting software to create queries, write reports and develop audit trails.

81. Ex-RBI Governor’s speech …
Independence
The growth of large international firms of accountants has created an opportunity for the provision of a multiplicity of services. However, this also raises the vexed question of the extent to which provision of these multiple services erodes the concept of independence.
The profession has argued for years that self-regulation and peer review are the right way to maintain standards. But the conduct of Enron, Parmalat etc. under the very nose of auditors has raised question about the effectiveness of soft regulation. The profession has to find a way of remedying this if it wants to prevent the imposition of an external regulator.
The second reform is the need to eliminate conflict of interest in accounting firms. Should there be a ban on auditors selling consulting services to those they audit? One view is that there is no real conflict of interest and that better audits would be the best way to assure regulators that such a ban is unnecessary. Yet if confidence in auditing is to be regained, perception is equally important. Regulators are likely to demand some meaningful change on the issue of such conflict of interest.

82. Ex-RBI Governor’s speech …
Inter-disciplinary Approach
In a complex world, no single profession can meet all the requirements of market participants. Neither is it possible for individual professions to operate in silos catering to specialized needs. Inter-disciplinary interaction is therefore not only unavoidable, but in fact desirable.
Value Systems
Recent months have witnessed an agitation across the country about erosion of values in the public domain. The norms of a society are determined by the dominant sections of that society, and the accounting profession is certainly a dominant section of society. The value system you practise in your professional conduct influences the value system of the society. Sadly, we see several transgressions.

83. Ex-RBI Governor’s speech …
With so much accounting misconduct in big corporations, stakeholders wonder why books are not being reviewed on the default assumption that there could be fraud afoot. Accounting experts explain that the kind of forensic auditing that reconstructs fraud is so time-consuming and expensive that it could bring an honest business to its knees. Returning to the larger issue of a value system, the challenge before the profession is therefore to demonstrate by its own conduct, its concern for upholding a value system within itself and consequently within its clientele as also to initiate programmes which create sensitivity to the need for greater ethical conduct. In this context I would only like to reiterate that you have a significant role as the conscience-keeper of the business world.

84. To conclude Master of ALL trades – EXPERT in ONE
There exists an expectation gap between what is expected by an auditor and what is delivered
Clearly, the profession needs to gear up to face the expectations and also the fast regulatory developments
Old saying: Jack of all trades – Master of None
Modified saying for changed economic scenario
Master of ALL trades – EXPERT in ONE

85. If you don't have a strategy, you're part of someone else's strategy.
Alvin Toffler
CNK