1. SA 700 (REVISED), SA 705 & 706 ASHOK SETH, Lucknow B. Sc, FCA, DISA (ICA) as@sethspro.com

2. Standards for Reporting  SA 700 (Revised) Forming an Opinion & Reporting on FS  SA 705 Modification to the Opinion in IAR  SA 706 Emphasis of Matter Paragraphs in IAR  SA 710 (Revised) Comparative Information  SA 2400 (Review) Engagement to review FS  SA 3400 The Examination of Prospective FS  SA 4400 To perform Agreed upon Procedures  SA 4410 Engagement to compile Financial Information 5th Aug 2011CA Ashok Seth2

3. AS 700 (Revised) EFFECTIVE FROM  For ALL audits relating to accounting periods beginning on or after 1 st April 2011.  So will be effective from Audit reports which we will issue for current FY 2011-12  Download http://www.icai.org/new_post.html?p ost_id=450&c_id=141 http://www.icai.org/new_post.html?p ost_id=450&c_id=141 5th Aug 2011CA Ashok Seth3

4. Should be read in the context of the  “Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services”, which sets out the authority of SAs and SA 200 (Revised), “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”. 5th Aug 2011CA Ashok Seth4

5. Scope- Deals with  Auditors responsibility to form an opinion on FS.  Form and  content of the auditor’s Report 5th Aug 2011CA Ashok Seth5

6. Forming an Opinion on the FS  Shall form an opinion whether FS are prepared in all material respects in accordance with applicable Financial Reporting Framework (FRF) Include qualitative aspects of accounting practices and Indicators of possible bias in management’s judgments (Para A1-A3) Contd 5th Aug 2011CA Ashok Seth6

7. Forming an Opinion- Contd.  to form that opinion, the auditor shall conclude as to whether he has obtained reasonable assurance about whether the FS as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account: That the Auditor’s conclusions is Contd 5th Aug 2011CA Ashok Seth7

8. Forming an Opinion- Contd.  in accordance with SA 330, whether sufficient appropriate audit evidence has been obtained;  in accordance with SA 450, whether uncorrected misstatements are material, individually or in aggregate; &  The evaluations required by Para 12- 15. 5th Aug 2011CA Ashok Seth8

9. Auditor shall evaluate whether  The FS adequately disclose the significant accounting policies selected and applied;  The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate;  The accounting estimates made by management are reasonable; Contd. 5th Aug 2011CA Ashok Seth9

10. Auditor shall evaluate whether- Contd.  The information presented in the financial statements is relevant, reliable, comparable and understandable;  The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and (Ref: Para. A4)  The terminology used in the financial statements, including the title of each financial statement, is appropriate 5th Aug 2011CA Ashok Seth10

11. Fair Presentation Whether FS 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. 5th Aug 2011CA Ashok Seth11

12.  The auditor shall evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. (Ref: Para. A5-A10) 5th Aug 2011CA Ashok Seth12

13. FORM OF OPINION  Unmodified Opinion When FS in all material respects prepared in accordance with FRF  Modified Opinion- SA 705 If based upon the audit evidence FS as a whole are not free from material misstatement If unable to obtain sufficient appropriate audit evidence 5th Aug 2011CA Ashok Seth13

14. Auditor’s Report- Types  for Audits Conducted in Accordance with Standards on Auditing  Prescribed by Law or Regulation  for Audits Conducted in Accordance with Both Auditing Standards issued by the Institute of Chartered Accountants of India and International Standards on Auditing  Supplementary Information Presented with the Financial Statements 5th Aug 2011CA Ashok Seth14

15. for Audits Conducted in Accordance with S A  Title  Addressee  Introductory paragraph  Management Responsibility for the FS  Auditor’s Responsibility  Auditor’s Opinion  Other Reporting Responsibilities  Date, Place and Signature of the Auditor 5th Aug 2011CA Ashok Seth15

16. Title & Addressee  Title (A15) “Independent Auditors Report”  Addressee (A16) As required by the circumstances Normally addressed to those for whom the report is prepared 5th Aug 2011CA Ashok Seth16

17. Introductory paragraph (A17 to A19)  SHALL: - Identify the entity State that the FS have ben audited Identify the title of each statement that comprises FS Refer to summary of Significant Accounting Policies and other explanatory information Specify the date or period covered by each FS 5th Aug 2011CA Ashok Seth17

18. Management Responsibility for the FS  Use the term that is appropriate in legal or regulatory framework applicable May not be word “management” May be “those charged with governance” Board of Directors under Co Act  report shall include a section with the heading “Management’s [or other appropriate term] Responsibility for the FS Contd. 5th Aug 2011CA Ashok Seth18

19. Management Responsibility for the FS (A20-A22)- Contd.  in the manner in which that responsibility is described in the terms of the audit engagement.  The description shall include an explanation that management is responsible for the preparation of the financial statements in accordance with the applicable FRF 5th Aug 2011CA Ashok Seth19

20. Management Responsibility for the FS - Contd.  Where the FS are prepared in accordance with a fair presentation framework, the explanation of management’s responsibility for the FS in the auditor’s report shall refer to “the preparation and fair presentation of these FS” or “the preparation of FS that give a true and fair view” 5th Aug 2011CA Ashok Seth20

21. AUDITOR’S RESPONSIBILITY  The shall include a section with the heading “Auditor’s Responsibility”.  The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. Contd. 5th Aug 2011CA Ashok Seth21

22. AUDITOR’S RESPONSIBILITY- Contd.  that the audit was conducted in accordance with Standards on Auditing issued by the ICAI. The auditor’s report shall also explain that those Standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 5th Aug 2011CA Ashok Seth22

23. Audit Report Shall also describe that: -  An audit involves performing procedures to obtain audit evidence  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the FS in order to design audit procedures that are appropriate in the circumstances, 5th Aug 2011CA Ashok Seth23

24. Audit Report Shall also describe that: -  An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements  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 5th Aug 2011CA Ashok Seth24

25. Auditor’s Opinion- Section with the heading “Opinion”  In an unmodified opinion 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, (A26-A32) (a) The financial statements present fairly, in all material respects, in accordance with [the applicable financial reporting framework]; or (b) The financial statements give a true and fair view of in accordance with [the applicable financial reporting framework]. 5th Aug 2011CA Ashok Seth25

26.  When expressing an unmodified opinion on FS prepared in accordance with a compliance framework, the auditor’s opinion shall be that the financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework]. (A26, A28- A32) 5th Aug 2011CA Ashok Seth26

27. IF FRF not based on Indian AS  If the reference to the applicable financial reporting framework, in the auditor’s opinion, is not to the Accounting Standards of ICAI or Accounting Standards, notified by the Central Government or the Accounting Standards for Local Bodies promulgated by the ICAI, the auditor’s opinion shall identify the jurisdiction of origin of the framework. 5th Aug 2011CA Ashok Seth27

28. Other Reporting Responsibilities  these other reporting responsibilities shall be addressed in a separate section in the auditor’s report that shall be sub-titled “Report on Other Legal and Regulatory Requirements,” or otherwise as appropriate to the content of the section. (A33-A34)  Contd. 5th Aug 2011CA Ashok Seth28

29. Contd.  If the auditor’s report contains a separate section on other reporting responsibilities, the headings, statements and explanations referred to in paragraphs 23-37 shall be under the sub-title “Report on the Financial Statements.” The “Report on Other Legal and Regulatory Requirements” shall follow the “Report on the Financial Statements.” 5th Aug 2011CA Ashok Seth29

30. Signatures, Date, Place  Shall be Signed  The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence, including evidence that: (a) All the statements in the FS, including the related notes, have been prepared; and (b) Those with the recognised authority have asserted that they have taken responsibility for those FS  Location where the Report is signed 5th Aug 2011CA Ashok Seth30

31. Auditor’s Report Prescribed by Law or Regulation  When the differences between the legal or regulatory requirements and SAs relate only to the layout and wording of the auditor’s report and, at a minimum, each of the elements identified in paragraph 43(a)-(i) are included in the auditor’s report, the auditor’s report may refer to Standards on Auditing. Otherwise Auditor may not refer to SA 5th Aug 2011CA Ashok Seth31

32. Report for Audits in Accordance with Both Auditing Standards  Audits Conducted in Accordance with Both Auditing Standards of ICAI and International Standards on Auditing May refer to both standards ONLY IF There is no conflict between the requirements in the national auditing standards and those in ISAs that would lead the auditor (i) to form a different opinion, or (ii) not to include an Emphasis of Matter paragraph that, in the particular circumstances, is required by ISAs 5th Aug 2011CA Ashok Seth32

33. Supplementary Information Presented with the FS  Supplementary information should be clearly differentiated from the audited FS.  IF Can not be differentiated then the auditor shall explain in the auditor’s report that such supplementary information has not been audited. Or if Integral part of FS it is presented shall be covered by the auditor’s opinion 5th Aug 2011CA Ashok Seth33

34. Appendix- I Illustration -1  prepared under the Cos Act FRF, which is a fair presentation framework.  terms of the audit engagement reflect description of management’s responsibility for the FS  The report is unmodified and does not include either an Emphasis of Matter paragraph or an Other Matter(s) paragraph  other reporting responsibilities required under the Cos Act and/or other regulatory requirements 5th Aug 2011CA Ashok Seth34

35. Appendix- I Illustration -2  Audit of complete set of Consolidated general purpose FS of parent company prepared under accounting principles generally accepted in India, as required for compliance with SEBI’s requirement, which is a fair presentation framework.  Terms of the group audit engagement reflect description of management’s responsibility for the FS  The report is unmodified 5th Aug 2011CA Ashok Seth35

36. Appendix- I Illustration -3  Audit of a complete set of separate general purpose FS of an entity prepared in accordance with the requirements of XYZ Law of India under a compliance framework. (is a NOT a fair presentation framework)  The terms of the audit engagement reflect the description of management’s responsibility for the financial statements in SA  The report is unmodified 5th Aug 2011CA Ashok Seth36

37. SA 705 When Modification Required  The auditor concludes that, based on the audit evidence obtained, the FS as a whole are not free from material misstatement; or (Ref: Para. A2-A7)  The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the FS as a whole are free from material misstatement. (Ref: Para. A8-A12) 5th Aug 2011CA Ashok Seth37

38. SA 705- Modification to the Opinion in the IAR  Three Types of Modified Opinions: - Qualified Opinion Adverse Opinion Disclaimer Opinion  Refer Para A1 for decision regarding which type of modified opinion is appropriate depends upon 5th Aug 2011CA Ashok Seth38

39. Decision Matrix Nature of Matter Giving Rise to the Modification Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the FS Material but Not Pervasive Material and Pervasive FS are materially misstated Qualified OpinionAdverse Opinion Inability to obtain sufficient appropriate audit evidence Qualified OpinionDisclaimer of opinion 5th Aug 2011CA Ashok Seth39

40. Imposed- Limitation after the Acceptance of Engagement  Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence the auditor shall request that management remove the limitation Perform alternative procedures to obtain sufficient appropriate audit evidence if possible Then Qualify the Opinion OR resign 5th Aug 2011CA Ashok Seth40

41. Modified Opinion- Form & Content  Shall, include a Para in the report that provides a description of the matter giving rise to the modification.  Place this Para immediately before the opinion Para in the report & use the heading “Basis for Qualified Opinion”, “Basis for Adverse Opinion”, or “Basis for Disclaimer of Opinion”, as appropriate. (Ref: Para. A17) 5th Aug 2011CA Ashok Seth41

42. Modified Opinion- Form & Content- Contd.  material misstatement that relates to specific amounts in the FS (including quantitative disclosures), the auditor shall include in the basis for modification Para a description & quantification of the financial effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial effects, the auditor shall so state in the basis for modification paragraph 5th Aug 2011CA Ashok Seth42

43. Modified Opinion- Form & Content- Contd.  If there is a material misstatement of the FS that relates to narrative disclosures, the auditor shall include in the basis for modification Para an explanation of how the disclosures are misstated Describe in the basis for modification Para the nature of the omitted information; and Unless prohibited by law, include the omitted disclosures, provided it is practicable to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted information. 5th Aug 2011CA Ashok Seth43

44. Modified Opinion- Form & Content- Contd.  If the modification results from an inability to obtain sufficient appropriate audit evidence, the auditor shall include in the basis for modification paragraph, the reasons for that inability. 5th Aug 2011CA Ashok Seth44

45. OPINION PARAGRAPH  When the auditor modifies the audit opinion: shall use the heading “Qualified Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”, as appropriate, for the opinion paragraph 5th Aug 2011CA Ashok Seth45

46. Qualified Opinion- material misstatement  State that, except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph when reporting in a fair presentation framework -The FS present fairly, in all material respects (or give a true and fair view) in accordance with the applicable FRF; or when reporting in compliance framework - The FS have been prepared, in all material respects, in accordance with the applicable FRF 5th Aug 2011CA Ashok Seth46

47. Qualified Opinion- Inability to obtain sufficient evidence  shall use the corresponding phrase “except for the possible effects of the matter(s)...” for the modified opinion. 5th Aug 2011CA Ashok Seth47

48. Adverse Opinion  State- because of the significance of the matter of the matter(s) described in the Basis for Adverse Opinion paragraph when reporting in a fair presentation framework -The FS do not present fairly, (or give a true and fair view) in accordance with the applicable FRF; or when reporting in compliance framework - The FS have not been prepared, in all material respects, in accordance with the applicable FRF. 5th Aug 2011CA Ashok Seth48

49. Disclaimer Opinion- Inability to obtain sufficient evidence  shall state in the opinion paragraph that because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion; and, accordingly, the auditor does not express an opinion on the financial statements 5th Aug 2011CA Ashok Seth49

50. Description of Auditor’s Responsibility  When the Auditor Expresses a Qualified or Adverse Opinion the auditor shall amend the description of the auditor’s responsibility to state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s modified audit opinion. 5th Aug 2011CA Ashok Seth50

51. Description of Auditor’s Responsibility  When the Auditor Disclaims an Opinion due to an inability to obtain sufficient appropriate audit evidence- shall amend the introductory paragraph of the report to state that the auditor was engaged to audit the FS. The auditor shall also amend the description of the auditor’s responsibility 5th Aug 2011CA Ashok Seth51

52. Contd.  and the description of the scope of the audit to state only the following: “Our responsibility is to express an opinion on the FS based on conducting the audit in accordance with SA issued by the ICAI. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion”. 5th Aug 2011CA Ashok Seth52

53. Communication with Those Charged with Governance  When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with those charged with governance the circumstances that led to the expected modification and the proposed wording of the modification. 5th Aug 2011CA Ashok Seth53

54. Emphasis of Matter Para and Other Matter Para- SA 706  Additional communication in the auditor’s report to draw users’ attention to a matter or matters presented or disclosed in the FS or other than those presented  that are of such importance that they are fundamental to users’ understanding of the FS 5th Aug 2011CA Ashok Seth54

55. When Auditor includes Emphasis of matter Paragraph  Include it immediately after the Opinion paragraph  Use the heading “Emphasis of Matter”, or other appropriate heading  Include in the Para a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the FS; and  Indicate that the auditor’s opinion is not modified in respect of the matter emphasized. 5th Aug 2011CA Ashok Seth55

56. THANK YOU Please mail your comments to as@sethspro.com 5th Aug 201156CA Ashok Seth

57. If you wait for happy moments, you will wait forever. But if you start believing that you are happy, you will be happy forever. Good Day! 5th Aug 2011CA Ashok Seth57

58. 5th Aug 201158 Have a good day CA Ashok Seth