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Auditing Theory

Notes necessary if the entity is unable to continue as a ‘going concern’. SAP 16 states that if adequate
disclosure of the above facts is made in the financial statements, the auditor need not qualify his
report. However, he is required to highlight the problem by drawing attention to the note in the
financial statement which discloses the matter as set out above. The Auditor can also issue a
disclaimer of opinion for going concern uncertainty. Adverse opinion or qualified opinion should
be expressed where the Auditor feels that the disclosure is not adequate.

6.9.4 Going concern Status being Inappropriate

If the Auditor feels that the company will not be able to maintain its status as a going concern he
should state that the assumption of the company being a going concern is not applicable in the
particular case. SAP 16 has become operational for all Audits relating to accounting periods
beginning April 1999. There may be a few problems in the areas where the judgment of auditor
is sought regarding non-financial matters. The high responsibility given to the auditor has also
meant that the liabilities for failure to deliver are also enhanced. There are doubts as to whether
the profession is ready to deliver such high levels of expectations.

6.10 Duty of Statutory Auditor for Compliance with Accounting

Standards

Section 211(3A) of Companies Act, 1956 provides that every profit and loss account and balance
sheet of the company shall comply with the accounting standards.
The statutory auditors are required to make qualification in their report in case any item is
treated differently from the prescribed Accounting Standard. However, while qualifying, they
should consider the materiality of the relevant item. In addition to this Section 227(3)(d) of
Companies Act, 1956 requires an auditor to report whether, in his opinion, the profit and loss
account and balance sheet are complied with the accounting standards referred to in Section
211(3C) of Companies Act, 1956.
How many Accounting Standards have been prescribed? Are these applicable to all companies
irrespective of its size?
In all 29 Accounting Standards have been prescribed. However their applicability is dependent
on its size – Level I/II/III Company. The following table lists out the Accounting Standards and
its applicability.
Level I Company: Enterprises, which fall in any one or more of the following categories, at any
time during the accounting period, are classified as Level I enterprises:
1. Enterprises whose equity or debt securities are listed whether in India or outside India.

2. Enterprises, which are in the process of listing their equity or debt securities as evidenced
by the board of directors’ resolution in this regard.

3. Banks including co-operative banks.
4. Financial Institutions
5. Enterprises carrying on insurance business.
6. All commercial, industrial and business reporting enterprises, whose turnover for the
immediately preceding accounting period on the basis of audited financial statements
exceeds ` 500 million. Turnover does not include ‘other income’.

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