Page 230 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes valid. A qualification should be clear and precise and the manner in which qualifications are
made in the auditor’s report should be such as not to leave any room for doubt in the minds of
the public. The company’s auditor should mention clearly whether in his opinion a particular
matter stated in his report is in the nature of a qualification or is merely an explanation. A factual
reference in the report does not automatically become a qualification. The use of the expression
‘read with the notes thereon’ does not qualify the contents of the auditor’s report. In any case, the
notes are necessarily apart of the accounts and even if the auditor does not make a specific
reference thereto, his report automatically covers them
The report prepared by the auditor’s should be comprehensive and brief and specify the matters in
respect of which the auditors have reservations or qualifications, and the amounts involved in
clear and unambiguous manner, leaving no scope for misinterpretation. Full information and if
that is not available as much information as is available should be given in the report. Vague
statements, the effect of which is not ascertainable on the accounts should be avoided. The auditor
should avoid making qualifications in his report, which do not contain any real objection on his
report. Further, it is not a good practice to qualify the present Report by reference to a report made
in an earlier year because the shareholders may not have access to such reports. Each year’s
accounts being independent, the essential facts relating to a qualification made in an earlier year
must be repeated where appropriate. All qualifications should be contained in the auditor’s report
itself and should appear at one place in order to give the reader a clear view thereof.

Notes in the Report

Notes appended at the foot of the financial statements normally represent the explanations
given by the directors elucidating or clarifying various items of accounts. The notes may include
those giving specific information required by Schedule VI to the Companies Act, for example,
arrears of dividends on preference shares’, computation of managerial Remuneration, etc. If the
auditor qualifies his report by making reference to the notes or if the qualifications made by the
auditor are also included in these notes, the shareholders may be unable to appreciate the significance
of such qualifications. It is, therefore, necessary that the notes to accounts should not contain
the opinion of the auditor. Further, the auditor should only reproduce notes of a qualificatory
nature in his report to enable the reader to know the importance of the qualifications. The
word ‘reproduce’ does not imply a verbatim reproduction of the qualificatory notes. Where
notes of a qualificatory nature appear in the accounts, the auditor should state all qualifications
independently of his report in an adequate manner so as to enable a reader to assess the
significance of these qualifications. However, where a note has already been given in detail
by the management, it is not necessary to reproduce it verbatim in the audit report and a brief
self-explanatory statement may be sufficient. The auditor should quantify, wherever possible,
the effect of the qualifications on the financial statements, if the same is material. Where it is
not possible to precisely quantify the effect of the qualifications, the auditor may do so on the
basis of estimates made by the management after carrying out such tests as is possible and he
may then indicate that the figures are based on the management’s estimates. An auditor
should not be satisfied merely by vouchers, apparently formal and regular but should by fair
and reasonable examination of them, see that they are not for payments in any way unauthorized
or illegal or improper.

Report on Annexed Documents

The report has to deal not only with the accounts and balance sheet and profit and loss accounts,
but also every other document declared to be part of or annexed to the balance sheet and profit
and loss account. Among the documents required to be annexed is also included a list relating to
investments, if any, specified in Section 372(9) of the Companies Act with all the particulars
required to be stated therein.

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