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Greater Clarity On Preparing Audit Reports

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This is going to come as good news to companies whose accounts are currently being audited for the financial year ended March 31, 2015. Auditors have been provided with more clarity on their powers while preparing audit reports. Instead of relying on certain key words mentioned as part of their 'powers and duties' in the new Companies Act, the auditors have been urged to make remarks, observation or give their opinion in relation to the financial statement of the company. A guidance note on issues related to reporting certain matters while preparing an audit report has just been released by the Institute of Chartered Accountants of India (ICAI), the regulatory body of the auditors.
 
The move, experts said, is expected to guide the auditors in respect to the powers and duties laid down under Section 143 of the new Companies Act, 2013. This is the second such note within a short span of time brought out by ICAI. The first one dealing with issues related to 'reporting fraud' was released four weeks ago.
 
A sub-section of Section 143 of the Act lays down certain matters required to be reported upon by the auditor in his report. Under this section, the words “qualification”, “adverse remark” and “reservation” have been used. The Institute of Chartered Accountants of India has urged the auditors to instead use “qualified opinion”, “adverse opinion” and “disclaimer of opinion”, respectively while preparing their reports.
 
As per Section 143, the auditor has to incorporate any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. However, the guidance note, which was approved last week by ICAI suggests that the matters to be reported under the sub-sections of Section 143 need to be evaluated based on the financial statements prepared under the Act. "This is also consistent with the other reporting responsibilities of the auditor on books of account and compliance with notified/specified accounting standards that are reported by him under Section 143 (3)," said the guidance note issued by ICAI on Monday (20 April).
 
Auditing Standard 240 states that in an audit, the auditor does not guarantee that material mis-statements, whether from fraud or error, will be detected. Also, the auditor is required to communicate the fraud information to management, and those charged with governance and, in some circumstances, when so required by the laws and regulations, to regulatory and enforcement authorities also. However, there is no requirement of directly reporting to the central government. But the section on power and duties of auditors in the new company laws changed that making auditors responsible for reporting fraud in a company.
 
Section 143 has already generated its share of criticism when the onus of reporting fraud was assigned to the auditors under the new company laws that came into effect starting April 1, 2014. To help auditors tackle the issue of 'reporting fraud', ICAI has already a new guidance few weeks ago. ICAI has asked auditors to apply "professional scepticism" before flagging such cases to the government and take into account the measures already taken by the companies internally.
 
Under Section 143(12) of the Act, statutory auditors are required to report to the central government about a fraud or suspected fraud committed against the company by the officers or employees of the firm.
 
The Institute of Chartered Accountants of India has said that such reporting needs to be done only if such frauds would have a material impact on the financial statements.
 
"In case a fraud has already been reported or has been identified/detected by the management or through the company's vigil/whistle blower mechanism and has been/is being remediated/dealt with by them and such case is informed to the auditor, the latter will not be required to report the same ...," ICAI said in the note issued recently. This is because the auditor has not per se identified the fraud, it added.
 
According to the note, the auditor should apply "professional scepticism" to evaluate whether the fraud was indeed identified in all aspects by the management or through the company's whistle-blower mechanism.
 
ICAI said that such an approach would help in making a between frauds identified due to matters raised by the auditor and those detected by company through its internal control mechanisms.

(ashish.sinha@businessworld.in)


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