Sie sind auf Seite 1von 39

Overall Objectives of the Auditor

SA 200-Overall objectives of the independent auditor and the conduct of an audit in


accordance with standards on auditing establishes the independent auditors overall
responsibilities which conducting an audit of financial statements in accordance with SAs.
Specifically, it sets out the overall objectives of the independent auditor, and explains the
nature and scope of an audit designed to enable the independent auditor to meet those
objectives.
In conducting an audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditors findings.
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditors report is insufficient in the circumstances for purposes of reporting to the intended
users of the financial statements, the SAs require that the auditor disclaim an opinion or
withdraw from the engagement, where withdrawal is legally permitted.
As per SA 200 A- objective and scope of audit of financial statements, the objective of an
audit of financial statements, prepared within a framework of recognised accounting policies
and practices and relevant statutory requirements, if any, is to enable an auditor to express an
opinion on such financial statements. The auditors opinion helps determination of the true
and fair view of the financial position and operating results of an enterprise. The user,
however, should not assume that the auditors opinion is an assurance as to the future
viability of the enterprise or the efficiency or effectiveness with which management has
conducted the affairs of the enterprise.

What is Misstatements
According to SA 240 Misstatements in the financial statements can arise from either fraud or
error.
Misstatements in the financial statements can arise from fraud or error. The term "error"
refers to an unintentional misstatement in the financial statements, including the omission of
an amount or a disclosure, such as:

MCOM PART-II () Page 1


A mistake in gathering or processing data from which financial statements are prepared.
An incorrect accounting estimate arising from oversight or misinterpretation of facts.
A mistake in the application of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
The term "fraud" refers to an intentional act by one or more individuals among management,
those charged with governance, employees, or third parties, involving the use of deception to
obtain an unjust or illegal advantage.
Although fraud is a broad legal concept, the auditor is concerned with fraudulent acts that
cause a material misstatement in the financial statements. Misstatement of the financial
statements may not be the objective of some frauds. Auditors do not make legal
determinations of whether fraud has actually occurred.
Fraud involving one or more members of management or those charged with governance is
referred to as "management fraud"; fraud involving only employees of the entity is referred to
as "employee fraud". In either case, there may be collusion with third parties outside the
entity.
Two types of intentional misstatements are relevant to the auditor's consideration of fraud-
misstatements resulting from fraudulent financial reporting and misstatements resulting from
misappropriation of assets.
Fraudulent financial reporting involves intentional misstatements or omissions of amounts or
disclosures in financial statements to deceive financial statement users. Fraudulent financial
reporting may involve:
Deception such as manipulation, falsification, or alteration of accounting records or
supporting documents from which the financial statements are prepared.
Misrepresentation in, or intentional omission from, the financial statements of events,
transactions or other significant information.
Intentional misapplication of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
Misappropriation of assets involves the theft of an entity's assets. Misappropriation of assets
can be accomplished in a variety of ways (including embezzling receipts, stealing physical or
intangible assets, or causing an entity to pay for goods and services not received); it is often
accompanied by false or misleading records or documents in order to conceal the fact that the
assets are missing.
Misappropriation of assets involves the theft of an entity's assets. Misappropriation of assets
can be accomplished in a variety of ways (including embezzling receipts, stealing physical or

MCOM PART-II () Page 2


intangible assets, or causing an entity to pay for goods and services not received); it is often
accompanied by false or misleading records or documents in order to conceal the fact that the
assets are missing.
The distinguishing factor between fraud and error is whether the underlying action that
results in the misstatement in the financial statements is intentional or unintentional. Unlike
error, fraud is intentional and usually involves deliberate concealment of the facts.
While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it
is difficult, if not impossible, for the auditor to determine intent, particularly in matters
involving management judgment, such as accounting estimates and the appropriate
application of accounting principles.
Thus the auditor should identify and assess the risks of material misstatement in the financial
statements due to fraud; obtain sufficient appropriate audit evidence about the assessed risks
of material misstatement due to fraud, through designing and implementing appropriate
responses and respond appropriately to identified or suspected fraud.

Basic Principles Governing an Audit


The Auditing and Assurance Standard 1 (SA 200) on Basic Principles Governing an Audit
issued by the Institute of Chartered Accountants of India describes the basic principles which
govern the auditors professional responsibilities and which should be complied with
whenever an audit of financial information of an entity is carried out. The basic principles as
stated in this statement are:
(i) Integrity, Objectivity and Independence: The auditor should be straightforward, honest
and sincere in his approach to his professional work. He should maintain an impartial
attitude and both be and appear to be free of any interest which might be regarded, whatever
its actual effect on being incompatible with integrity and objectivity.
(ii) Confidentiality: The auditor should respect the confidentiality of information acquired
in the course of his work and should not disclose any such information to a third party
without specific authority or unless there is a legal or professional duty to disclose.
(iii) Skill and Competence: The audit should be performed and the report prepared with due
professional care by persons who have adequate training, experience and competence in
auditing.

MCOM PART-II () Page 3


(iv) Work Performed by Others: When the auditor delegates work to assistants or uses work
performed by other auditors and experts, he will be entitled to rely on work performed by
others provided he exercises adequate skill and care and is not aware of any reasons to
believe that he should not have so relied. The auditor should carefully direct, supervise and
review work delegated to assistants and obtain reasonable assurance that work performed by
other auditors or experts is adequate for his purpose since he will continue to be responsible
for forming and expressing his opinion on the financial information.
(v) Documentation: The auditor should document matters which are important in providing
evidence that the audit was carried in accordance with the basic principles.
(vi) Planning: Planning enables the auditor to conduct and effective audit in an efficient and
timely manner. Primarily, planning should be based on the knowledge of the clients
business. Plans should be further developed and revised as necessary during the course of the
audit.
(vii) Audit Evidence: The auditor should obtain sufficient appropriate audit evidence through
the performance of compliance and substantive procedures to enable him to draw reasonable
conclusions therefrom on which to base his opinion on the financing information.
(viii) Accounting System and Internal Control: The auditor should reasonably assure
himself that the accounting system is adequate and that all the accounting information which
should be recorded has in fact been recorded. Internal controls normally contribute to such
assurance. The auditor should gain an understanding of the accounting system and related
internal controls and evaluate the same to determine the nature, timing and extent of other
audit procedures.
(ix) Audit Conclusions and Reporting: The auditor should review and assess the
conclusions drawn from the audit evidence obtained and from his knowledge of business of
the entity as the basis for the expression of his opinion on the financial information. This
review and assessment involves forming an overall conclusion as to whether:
(a) the financial information has been prepared using acceptable accounting policies
which have been consistently applied;
(b) the financial information complies with relevant regulations and statutory
requirements;
(c) there is adequate disclosure of all material matters relevant to the proper
presentation of the financial information, subject to statutory requirements, where applicable.
The auditor should contain a clear written expression of opinion on the financial information
and if the form or content of the report is laid down in or prescribed under any agreement or

MCOM PART-II () Page 4


statute or regulation, the audit report should comply with such requirements. When a
qualified opinion, adverse opinion or a disclaimer of opinion is to be given or reservation of
opinion on any matters is to be made, the audit report should state the reasons therefore.

Inherent limitations of Audit


The objective of an audit of financial statements, prepared within a framework of
recognised accounting policies and practices and relevant statutory requirements, if
any, is to enable an auditor to express an opinion on such financial statements.
In forming his opinion on the financial statements, the auditor follows procedures
designed to satisfy himself that the financial statements reflect a true and fair view of
the financial position and operating results of the enterprise.
The process of auditing, however, is such that it suffers from certain inherent
limitations, i.e., the limitation which cannot be overcome irrespective of the nature
and extent of audit procedures.
Such limitations arise, first of all, on account of exercise of judgment in the auditors
work in deciding the extent of audit procedures and exercising judgment also in
assessing the reasonableness of the judgment and estimates made by the management
in preparing the financial statements. Secondly, much of the evidence available to the
auditor can enable him to draw only reasonable conclusions there from.
The audit evidence obtained by an auditor is generally persuasive in nature rather than
conclusive in nature. Because of these factors, the auditor can only express an
opinion. Therefore, absolute certainty in auditing is rarely attainable. There is also
likelihood that some material misstatements of the financial information resulting
from fraud or error, if either exists, may not be detected.
Another reason which may contribute to inherent limitation is the fact that the entire
audit process is generally dependent upon the existence of an effective system of
internal control.
In such an event, it is clearly evident that there will always be some risk of an internal
control system failing to operate as designed. No doubt, internal control system also
suffers from certain inherent limitations since any system of internal control is
ineffective against fraud involving collusion among employees or fraud committed by
management.

Certain levels of management may be in a position to override controls; for example, by


directing subordinates to record transactions incorrectly or to conceal them, or by suppressing
information relating to transactions. Such inherent limitations of internal control system also

MCOM PART-II () Page 5


contribute to inherent limitations of an audit. Therefore, it is quite apparent from above that
an audit suffers from certain inherent limitations.

An independent audit whether performed in terms of relevant statutory legislation or in terms


of the engagement, the auditor has to be reasonably satisfied as to whether the information
contained in the underlying accounting records and other source data is reliable for the
preparation of financial statements. Since the entire process of auditing is based on the
assessment of judgments made by the management of the entity as well as evaluation of
internal controls, the audit suffers certain inherent risks. Factors which can such risk in
conducting an audit are discussed below:

(i) Exercising judgement on the part of the auditor : The auditors work involves
exercise of judgement, for example, in deciding the extent of audit procedures and in
assessing the reasonableness of the judgements and estimates made by management in
preparing the financial statements.

(ii) Nature of audit evidence: The auditor normally relies upon persuasive evidence
rather than conclusive evidence. Even in circumstances where conclusive evidence is
available, the cost of obtaining such an evidence may far exceed the benefits.

(iii) Inherent limitations of internal control : Internal control can provide only
reasonable, but not absolute, assurance on account of several inherent limitations such as
potential for human error, possibility of circumstances of control through collussion, etc.
On account of above, it is quite nature that an audit suffers from control risk on
account of inherent limitations of internal control risk and detection risk on account of test
nature of audit and judgement and estimates involved in formulating accounting policies.

Defination of Audit Documentation:


Audit Documentation is defined as the record of audit procedures performed, relevant audit
evidence obtained and conclusions the auditor reached.
SA 230 deals with the auditors responsibility to prepare audit documentation for an audit of
financial statements.

Form and content of documentation

MCOM PART-II () Page 6


The form and content of audit documentation should be designed to meet the circumstances
of the particular audit. The information contained in audit documentation constitutes the
principal record of the work that the auditors have performed in accordance with standards
and the conclusions that the auditors have reached. The quantity, type, and content of audit
documentation are a matter of the auditors professional judgment. The Audit documentation
therefore is not restricted to being only on papers, but can also be on electronic media
Generally the factors that determine the form and content of documentations for a particular
engagement are:
a) The nature of the engagement
b) The nature of the business activity of the client
c) The status of the client
d) Reporting format
e) Relevant legislations applicable to the client
f) Records maintained by the client
g) Internal controls in operation
h) Quality of audit assistants engaged in the particular assignment and the need to direct
and supervise their work.

Permanent and Current Audit files


In the case of recurring audits, some working paper files may be classified as permanent audit
files, which are updated currently with information of continuing importance to succeeding
audits. In contrast current audit files contain information relating primarily to the audit of a
single period.

A) A permanent audit file normally includes:


a) Copy of initial appointment letter if the engagement is of recurring nature
b) Record of communication with the retiring auditor, if any, before acceptance of the
appointment as auditor
c) NOC from previous auditor
d) Information concerning the legal and organisational structure of the entity. In the
case of a company, this includes the Memorandum and Articles of Association. In
the case of a statutory corporation, this includes the Act and Regulations under
which the corporation functions .i.e.
e) In case of partnerships- Partnership deed
f) In case of trusts- Trust deed

MCOM PART-II () Page 7


g) In case of societies- Certificate of registration/ Rules and Bye-laws.
h) Organisational structure of the client
i) List of governing body including Name, Address and contact details. For Instance,
the List of Directors in case of a company, List of partners in a partnership and list
of Trustees in a Trust.
j) Extracts or copies of important legal documents, agreements and minutes relevant
to the audit.
k) A record of the study and evaluation of the internal controls related to the
accounting system. This might be in the form of narrative descriptions,
questionnaires or flow charts, or some combination thereof.
l) Copies of audited financial statements for previous years
m) Analysis of significant ratios and trends
n) Copies of management letters issued by the auditor, if any.
o) Notes regarding significant accounting policies.
p) Significant audit observations of earlier years.
q) Assessment of risks and risk management
r) Major policies related to Purchases and Sales
s) Details of sister concerns
t) Details of Bankers, Registrars, Lawyers etc
u) Systems and Data Security policies
v) Business Continuity Plans

B) A current file normally includes


The current file normally includes:
a) Correspondence relating to acceptance of annual reappointment.
b) Extracts of important matters in the minutes of Board Meetings and General Meetings,
as are relevant to the audit.
c) Evidence of the planning process of the audit and audit programme
d) Analysis of transactions and balances.
e) A record of the nature, timing and extent of auditing procedures performed, and the
results of such procedures
f) Evidence that the work performed by assistants was supervised and reviewed.
g) Copies of communications with other auditors, experts and other third parties.
h) Copies of letters or notes concerning audit matters communicated to or discussed with
the client, including the terms of the engagement and material weaknesses in relevant
internal controls.
i) Letters of representation or confirmation received from the client.

MCOM PART-II () Page 8


j) Conclusions reached by the auditor concerning significant aspects of the audit,
including the manner in which exceptions and unusual matters, if any, disclosed by the
auditors procedures were resolved or treated.
k) Copies of the financial information being reported on and the related audit reports.
l) Audit review points and highlight.
m) Major weakness in Internal control.

SA 500 Audit Evidence

Scope :
This Standard on Auditing (SA) explains what constitutes audit evidence in an audit of
financial statements, and deals with the auditors responsibility to design and perform audit
procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditors opinion.This SA is effective for audits of financial
statements for periods beginning on or after April 1, 2009.

Objective
The objective of the auditor is to design and perform audit procedures in such a way as to
enable the auditor to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditors opinion.

Thus, in brief, the evidence can be

Internal Evidence.

Internal- External evidence

External Evidence.

External-internal evidence.

However, it is important to know that external evidence which is obtained by the third party
directly from the third party is a more reliable audit evidence. The simple reason behind this
is clients involvement is absent. Hence, chances of manipulation in this type of evidence by
the client is not there.

MCOM PART-II () Page 9


Definitions

For purposes of the SA s, the following terms have the meanings attributed below:

a. Accounting records The records of initial accounting entries and supporting records,
such as checks and records of electronic fund transfers; invoices; contracts; the general and
subsidiary ledgers, journal entries and other adjustments to the financial statements that are
not reflected in journal entries; and records such as worksheets and spreadsheets supporting
cost allocations, computations, reconciliations and disclosures.

b. Appropriateness (of audit evidence) The measure of the quality of audit evidence; that
is, its relevance and its reliability in providing support for the conclusions on which the
auditors opinion is based.

c. Audit evidence Information used by the auditor in arriving at the conclusions on which
the auditors opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and other information.

d. Managements expert An individual or organization possessing expertise in a field other


than accounting or auditing, whose work in that field is used by the entity to assist the entity
in preparing the financial statements.

e. Sufficiency (of audit evidence) The measure of the quantity of audit evidence. The
quantity of the audit evidence needed is affected by the auditors assessment of the risks of
material misstatement and also by the quality of such audit evidence.

Audit procedures for obtaining audit evidence

1. Inspection

Inspection is done by the auditor of books of accounts and other relevant records. Inspection
can be done internally or externally and types of evidence may be in paper form, electronic
form etc. Even auditor may prefer to do a physical examination of an asset for getting
conclusive view about the asset appearing on the balance sheet. In this case, it is said to be

MCOM PART-II () Page 10


more reliable audit evidence. Its reliability depends on the nature and source of audit
evidence.

2. Observation

The auditor when watches the internal processes being performed within the organization of
the client, it is said to be observation. It is the close verification of the processes performed
by the client. We can take the example of inventory counting in these case. Auditor observes
the inventory counting performed by the client and forms his conclusion about the control
activities performed. By observation auditor can know about the internal control in the
organization is strong or weak.

3. External confirmation

To check the genuineness of the transactions appearing in the books of accounts, auditor
prefers to obtain external confirmation directly from the third party. It is always said that
external evidence is more reliable than internal evidence because it is obtained externally
without clients involvement and hence more reliable. We can take the instance of balance
confirmation in this case, for example, debtors balance confirmation, creditors balance
confirmation.

4. Recalculation

Recalculation consists of checking the mathematical accuracy of documents or records.


Recalculation may be performed manually or electronically.

5. Reperformance

Reperformance involves the auditors independent execution of procedures or controls that


were originally performed as part of the entitys internal control.

6. Analytical Procedures

Analytical procedures consist of evaluations of financial information made by a study of


plausible relationships among both financial and non-financial data. Analytical procedures
also encompass the investigation of identified fluctuations and relationships that are
inconsistent with other relevant information or deviate significantly from predicted amounts.

MCOM PART-II () Page 11


7. Inquiry

Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity. Inquiry is used extensively throughout the
audit in addition to other audit procedures.

Factors from which reliability of audit evidence is increased

Evidence if the source is from outside the entity.

Internal evidence reliability increases when internal control is effective.

External evidence is more reliable than internal evidence as of the absence of the
involvement of the client.

Written form evidence is more reliable

If the audit evidence is obtained from original documents then they are more reliable
rather than photocopies of it.

What is sufficiency and appropriateness of the audit evidence?

Audit evidence obtained will only be useful in reducing to an acceptably low level
the risk that the auditor could express an inappropriate opinion when the financial
statements are materially misstated and, therefore, allow the auditor to draw
reasonable conclusions, when it is sufficient and appropriate to the circumstances.

Sufficiency and appropriateness of audit evidence are two qualities that are
interrelated. Sufficiency is the measure of the quantity of audit evidence. The quantity
of audit evidence needed is affected by the risks of misstatement assessed by the
auditor, whereby the higher the risks the more audit evidence required, and by the
quality of the evidence, where the higher the quality the less evidence perhaps
required. A large amount of audit evidence may, however, not compensate for its poor
quality.

MCOM PART-II () Page 12


Appropriateness is the measure of the quality of audit evidence. The quality of audit
evidence depends on whether it is relevant and reliable in providing support to the
conclusions on which the auditors opinion is based. Whether evidence is reliable also
depends on its source; for instance, whether it is generated by the client, a third party

or the auditor; and also from its nature, whereby documentary evidence is normally
more reliable than verbal evidence.

Whether the audit evidence obtained in the course of an engagement is sufficient and
appropriate to support the auditors opinion is a matter of professional judgment that
the auditor needs to establish. Professional judgment is not, however, an abstract and
subjective category of the auditors frame of mind, and should be informed by a
structured approach to gathering evidence that is based on the assessed risks of
material misstatement of the financial statements.

Requirements

Sufficient Appropriate Audit evidence

The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence.

Information to be used as Audit Evidence

Relevance and reliability:

When designing and performing audit procedures, the auditor shall consider the
relevance and reliability of the information to be used as audit evidence.

Managements expert

When information to be used as audit evidence has been prepared using the work of a
managements expert, the auditor shall to the extent necessary having regard to the
significance of that experts work for the auditors purposes: a) evaluate the
competence, capabilities and objectivity of that expert; b) obtain an understanding of

MCOM PART-II () Page 13


the work of that expert; and c) evaluate the appropriateness of that experts work as
audit evidence for the relevant assertion.

Information produced by entity:

When using information produced by the entity, the auditor shall evaluate whether the
information is sufficiently reliable for the auditors purposed, including as necessary
in the circumstances:

a) Obtaining audit evidence about the accuracy and completeness of the information
and (b) evaluating whether the information is sufficiently precise and detailed for
the auditors purposes.

Selecting items for testing to obtain audit evidence

When designing tests of controls and tests of details, the auditor shall determine
means of selecting items for testing that are effective in meeting the purpose of the
audit procedure.

Inconsistency in, or doubts over reliability of, audit evidence

If audit evidence obtained from one source is inconsistent with that obtained from
another, or the auditor has doubts over the reliability of information to be used as
audit evidence, the auditor shall determine what modifications or additions to audit
procedures are necessary to resolve the matter, and shall consider the effect of the
matter, if any, on other aspects of the audit.

Information to be used as audit evidence

(A) Relevance

1. Direction of testing

Relevance deals with the logical connection with or bearing upon the purpose of the
audit procedure and where appropriate the assertion under consideration. The

MCOM PART-II () Page 14


relevance of information to be used as audit evidence may be affected by the direction
of testing. For example, if the purpose of an audit procedure is to test for
overstatement in the existence or valuation of accounts payable, testing the recorded
accounts payable may be a relevant audit procedure. On the other hand, when testing
for understatement in the existence or valuation of accounts payable, testing the
recorded accounts payable would not be relevant, but testing such information as
subsequent disbursements, unpaid invoices, suppliers statements and unmatched
receiving reports may be relevant.

2. Assertions:

A given set of audit procedures may provide audit evidence that is relevant to
certain assertions, but not others. For example, inspection of documents related to
the collection of receivables after the period end may provide audit evidence
regarding existence and valuation, but necessarily cut-off. Similarly, obtaining
audit evidence regarding a particular assertion, for example, the existence of
inventory, is not a substitute for obtaining audit evidence regarding another
assertion for example the valuation of that inventory. On the other hand, audit
evidence from different sources or of a different nature may often be relevant to
the same assertion.

3. Tests of controls:

Tests of controls are designed to evaluate the operating effectiveness of controls in


preventing, or detecting and correcting, material misstatements at the assertion
level. Designing tests of controls to obtain relevant audit evidence includes
identifying conditions that indicate performance of a control, and deviation
conditions which indicate departures from adequate performance, The presence or
absence of those conditions can then be tested by the auditor.

4. Substantive procedures:

Substantive procedures are designed to detect material misstatements at the


assertion level. They comprise tests of details and substantive analytical
procedures. Designing substantive procedures includes indentifying conditions

MCOM PART-II () Page 15


relevant to the purpose of the test that constitute a misstatement in the relevant
assertion.

(B) Reliability

1. Generalisations:
While recognising that exceptions may exist, the following generalisations about the
reliability of audit evidence may be useful:

The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.

The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity are
effective.

Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly or by inference.

Audit evidence in documentary form, whether paper, electronic or other medium is more
reliable than evidence obtained orally.

Audit evidence provided by original documents is more reliable than audit evidence provided
by photocopies or facsimiles, or documents that have been filmed, digitised or otherwise
transformed into electronic form, the reliability of which may depend on the controls over
their preparation and maintenance.

The reliability of information to be used as audit evidence, and therefore of the audit evidence
itself, is influenced by its source and its nature, and the circumstances under which it is
obtained, including the controls over its preparation and maintenance where relevant.
Therefore, generalisations about the reliability of various kinds of audit evidence are subject
to important exceptions. Even when information to be used as audit evidence is obtained
from sources external to the entity, circumstances may exist that could affect its reliability.
For example information obtain from an independent external source may not be reliable if
the source is not knowledgeable, or a managements expert may lack objectivity.

MCOM PART-II () Page 16


SA 240 deals with circumstances where the auditor has reason to believe that a document
may not be authentic, or may have been modified without that modification having been
disclosed to the auditor.

2. Reliability of Information produced by a managements expert:

The preparation of an entitys financial statements may require expertise in a field other than
accounting or auditing, such as actuarial calculations, valuations or engineering data. The
entity may employ or engage experts in these fields to obtain the needed expertise to prepare
the financial statements. Failure to do so when such expertise is necessary increases the risks
of material misstatement. The nature, timing and extent of audit procedures in this relation
may be affected by:

The nature and complexity of the matter to which the managements expert relates.
The risks of material misstatement in the matter.
The availability of alternative sources of audit evidence.
The nature , scope and objectives of the managements experts work.
Whether the managements expert is employed by the entity or is a partly engaged by
it to provide relevant services.
The extent to which management can exercise control or influence over the work of
the managements expert.
Whether the managements expert is subject to technical performance standards or
other professional or industry requirements.
The nature and extent of any controls within the entity over the managements
experts work.
The auditors knowledge and experience of the managements experts field of
expertise.
The auditors previous experience of the work of that expert.
3. Competence, Capabilities and objectivity of a managements expert:

Competence relates to the nature and level of expertise of the managements expert.
Capability relates the ability of the managements expert to exercise that competence in the
circumstances. Factors that influence capability may include for example geographic location
and availability of time and resources. Objectivity relates to the possible effects that bias
conflict of interest or the influence of others may have on the professional or business
judgement of the managements expert. The competence, capabilities and objectivity of a
managements expert and any controls within the entity over that experts work are important
factors in relation to the reliability of any information produced by a managements expert.

MCOM PART-II () Page 17


Personal experience with previous work of that expert
Discussions with that expert
Discussions with others who are familiar with that experts work
Knowledge of that experts qualifications, membership of a professional body or
industry association, license to practice or other forms of external recognition.
Published papers or books written by that expert.
An auditors expert if any who assists the auditor in obtaining sufficient appropriate
audit evidence with respect to information produced by the managements expert.

Definition of Books of accounts. (Companies Act 2013)


As per section 2(12) of the companies act, 2013, Book and paper and Book or paper
include books of account, deeds, vouchers, writings, documents, minutes and registers
maintained on paper or in electronic form; further, Books of account includes records
maintained in respect of -
a) All sums of money received and expended by a company and matters in relation to
which the receipts and expenditure take place;
b) All sales and purchases of goods and services by the company;
c) The assets and liabilities of the company; and
d) The items of cost as may be prescribed under section 148 in the case of a company
which belongs to any class of companies specified under that section;

Assets and Liabilities


Receipts and Payments
Sales and Purchases (stock) quantitative
Cost records

Maintenance of books of Accounts Section 128(1)


a) Every company shall prepare and keep at its registered office books of account and other
relevant books and papers and financial statements for every financial year which give a true
and fair view of the state of the affairs of the company, including that of its branch office or
offices, if any.
b) The company shall be in a position to explain the transactions effected both at the registered
office and its branches.
c) Such books of accounts shall be kept on accrual basis and according to the double entry
system of accounting.

Place of maintenance of books of accounts Section 128(1)


a) The books of account and other relevant papers are required to be kept at the registered office
of the company.

MCOM PART-II () Page 18


b) The company may also keep all or any of the books of accounts at any other place in India as
the board of directors may decide. In such a case, the company should file with the registrar
of companies, a notice in writing giving the full address of that place within 7 days of the
boards decision.
Proper books of account in relation to a branch of the company
a) Proper books of account relating to the transactions effected at the branch office in India
or outside India shall be kept at that branch office.
b) Proper summarized returns periodically must be sent by the branch office to the company
at its registered office or the other place as decided by the board of directors.

Methods of accounts
Every company shall keep and maintain the aforesaid books of accounts on accrual basis and
according to the double entry system of accounting. Therefore, if any company maintain its
books of account either on cash basis or single/ mixed entry system then it contravene the
provisions of section 128 of the companies act, 2013.

Period of maintenance of books of accounts of a company section 128(5)


a) The books of account of every company together with the vouchers relevant to any entry
in such books of accounts shall be kept in order by the company for a minimum period of
8 financial years immediately preceding a financial year.
b) Where the company had been in existence for a period of less than 8 years, it shall
maintain the books in respect of all such preceding years.
c) Where an investigation has been ordered in respect of the company, the central
government may direct that the books of account may be kept for such longer period as it
may deem fit.

Financial Statements: Section 2(40)


Financial Statement in relation to a company, includes-
a) a balance sheet as at the end of the financial year;
b) a profit and loss account, or in case of company carrying out activity not for profit, an
income and expenditure account for the financial year;
c) cash flow statement for the financial year;
d) statement of changes in equity, if applicable; and (v) any explanatory note annexed to,
or forming part of, any document referred to sub-clause
stated above.
e) Provided that the financial statement, with respect to One Person Company, small
company and dormant company, may not include the cash flow statement.

Form of Accounts
MCOM PART-II () Page 19
PART I- BALANCE SHEET

Particulars Note No. Figures as at the end Figures as at


of current reporting the end of
period previous
reporting
period

I. EQUITY AND LIABILITIES

1) Shareholders Funds
(a) Share Capital
(b) Reserves and Surplus A
(c) Money received against share warrants B

(2) Share application money pending


allotment

(3) Non-Current Liabilities


(a) Long-term borrowings C
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities D
(d) Long term provisions E

(4) Current Liabilities


(a) Short-term borrowings F
(b) Trade payables FA
(c) Other current liabilities G
(d) Short-term provisions H

Total

II.Assets

MCOM PART-II () Page 20


(1) Non-current assets
(a) Fixed assets
(i) Tangible assets I
(ii) Intangible assets J
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments K
(c) Deferred tax assets (net)
(d) Long term loans and advances L
(e) Other non-current assets M

(2) Current assets


(a) Current investments N
(b) Inventories O
(c) Trade receivables P
(d) Cash and cash equivalents Q
(e) Short-term loans and advances R
(f) Other current assets S

Total

General instructions for preparation of Balance Sheet

Operating Cycle
Time between The acquisition of assets for processing And Their realisation in cash or cash
equivalents
Where the normal operating cycle cannot be identified: It is assumed to have a duration of 12
months.

When an asset shall be classified as current?


If it satisfies any of the given criteria
(a) it is expected to be realised, or is intended for sale or consumption, in the companys
normal operating cycle; or
(b) it is held primarily for the purpose of being traded; or
(c) it is expected to be realised within twelve months after the reporting date; or

MCOM PART-II () Page 21


(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting date.
All other assets shall be classified as non-current.

When liability shall be classified as current ?


If it satisfies any of the given criteria
(a) It is expected to be settled in the company normal operating cycle; or
(b) It is held primarily for the purpose of being traded; or
(c) It is due to be settled within twelve months after the reporting date; or
(d)The company does not have an unconditional right to defer settlement of the liability for
least twelve months after the reporting cm Terms of a liability that could, at the option the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
All other liabilities shall be classified as non- current.

In
When receivable shall be classified as a trade receivable ?
The
If it is in respect of the amount due on account of goods sold or services rendered
Normal Course Of Business

Share Capital

For each Class of Share Capital (Different classes of preference shares to be treated
separately)
a. The number and amount of shares authorized.
b. The number of shares issued, subscribed and fully paid, and subscribed but not fully paid.
c. Par value per share.
d. A reconciliation of the number of shares outstanding at the beginning and at the end of the
reporting period.
e. The rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital.
f. Shares in respect of each class in the company held by its holding company or its ultimate
holding company including shares held by or by subsidiaries or associates of the holding
company or the ultimate holding company in aggregate.
g. Shares in the company held by each shareholder holding more than 5 per cent, shares
specifying the number of shares held.

MCOM PART-II () Page 22


h. Shares reserved for issue under options and contracts/commitments for the sale of
shares/disinvestment, including the terms and amounts.
i. separate particulars for a period of five years following the year in which the shares have
been allotted in respect of:
i) Aggregate number and class of shares allotted as fully paid-up pursuant to contract(s)
without payment being received in cash.
ii) Aggregate number and class of shares allotted as fully paid-up by way of bonus shares.
iii) Aggregate number and class of shares bought back.
j. Terms of any securities convertible into equity/preference shares issued along with the
earliest date of conversion in descending order starting from the farthest such date.

When payable shall be classified as a trade payable ?


If it is in respect of the amount due on account of goods purchased or services received
In The Normal Course Of Business

Reserves and Surplus


shall be classified as
1) Capital Reserves;
2) Capital Redemption Reserve;
3) Securities Premium Reserve;
4) Debenture Redemption Reserve;
5) Revaluation Reserve;
6) Share Options Outstanding Account;
7) Other Reserves(specify the nature and purpose of each reserve and the amount in respect
thereof);
8) Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and
appropriations such as dividend, bonus snares and transfer to/from reserves, etc.;
(Additions and deductions since last balance sheet to be shown under each of the specified
heads);
Reserve specifically represented by earmarked investments shall be termed as a fund.
Debit balance of statement of profit and loss Shall be shown as a negative figure under the
head Surplus. Similarly, the balance of Reserves and Surplus, after adjusting negative
balance of surplus, if any, shall be shown under the head Reserves and Surplus even if the
resulting figure is in the negative.

MCOM PART-II () Page 23


Long-Term Borrowings
shall be classified as
1) Bonds/debentures;
2) Term loans:
(i) from banks.
(ii) from other parties
3) Deferred payment liabilities;
4) Deposits;
5) Loans and advances from related parties;
6) Long term maturities of finance lease obligations;
7) Other loans and advances (specify nature)
Borrowings shall be further sub-classified as SECURED AND UNSECURED (Nature of
security shall be specified separately in each case)
Where loans have been guaranteed by directors or others The aggregate amount of such
loans under each head shall be disclosed.
Bonds/debentures (along with the rate of interest and particulars of redemption or
conversion, as the case maybe) shall be stated in descending order of maturity or
conversion, starting from farthest redemption or conversion date, as the case may be. Where
bonds/debentures are redeemable by instalments, the date of maturity for this purpose must
be reckoned as the date on which the first instalment becomes due.
Particulars of any redeemed bonds/debentures which the company has power to reissue
shall be disclosed
Shall state Terms of repayment of term loans and other loans
Shall specify Period and amount of continuing default as on the balance sheet date in
repayment of loans and interest(separately in each case)
(2) Others.
Other Long-term Liabilities
Long-term provisions
shall be classified as
shall be classified as
(1) Trade payables;
Provision for employee
benefits;
Others (specify nature)
Short-term borrowings

MCOM PART-II () Page 24


shall be classified as
1) Loans repayable on demand;
(i) from banks.
(ii) from other parties.
(iii) Loans and advances from related parties;
(iv) Deposits;
(v) Other loans and advances (specify nature).
Borrowings shall further be sub-classified as
secured and unsecured(Nature of security shall be specified separately in each case)
Where loans have been guaranteed by directors or others
The aggregate amount of such loans under each head shall be disclosed.
Shall specify
Period and amount of continuing default as on the balance sheet date in repayment of loans
and interest (separately in each case)

Other current liabilities


shall be classified as
1) Current maturities of long-term debt;
2) Current maturities of finance lease obligations;
3) Interest accrued but not due on borrowings;
4) Interest accrued and due on borrowings;
5) Income received in advance;
6) Unpaid dividends;
7) Application money received for allotment of securities and due for refund and interest
accrued thereon. Share application money includes advances towards allotment of share
capital. The terms and conditions including the number of shares proposed to be issued, the
amount of premium, if any, and the period before which shares shall be allotted shall be
disclosed. It shall also be disclosed whether the company has sufficient authorised capital to
cover the share capital amount resulting from allotment of shares out of such share
application money. Further, the period for which the share application money has been
pending beyond the period for allotment as mentioned in the document inviting application
for shares along with the reason for such share application money being pending shall be
disclosed. Share application money not exceeding the issued capital and to the extent not
refundable shall be shown under the head Equity and share application money to the extent

MCOM PART-II () Page 25


refundable, i.e., the amount in excess of subscription or in case the requirements of minimum
subscription are not met, shall be separately shown under Other current liabilities;
8) Unpaid matured deposits and interest accrued thereon;
9) Unpaid matured debentures and interest accrued thereon;
10) Other payables (specify nature).

2) Others (specify nature). Short-term provisions


shall be classified as
Tangible assets
1) Provision for employee benefits
Classification shall be
given as
1) Land;
2) Buildings;
3) Plant and Equipment;
4) Furniture and Fixtures;
5) Vehicles;
6) Office equipment;
7) Others (specify nature).
Assets Under lease shall be separately specified under each class of asset
A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions
through business combinations and other adjustments and the related depreciation and
impairment losses/reversals shall be disclosed separately.

Intangible assets
Classification shall be given as
1) Goodwill;
2) Brands /trademarks;
3) Computer software;
4) Mastheads and publishing titles;
5) Mining rights;
6) Copyrights, and patents and other intellectual property rights, services and operating
rights;
7) Recipes, formulae, models, designs and prototypes;
8) Licences and franchise;

MCOM PART-II () Page 26


9) Others (specify nature).
A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period
showing additions, disposals, acquisitions through business combinations and other
adjustments and the related depreciation and impairment losses/reversals shall be disclosed
separately.

Non-current investments
shall be classified as trade investments and other investments and further classified as
1) Investment property;
2) Investments in Equity Instruments;
3) Investments in preference shares;
4) Investments in Government or trust securities;
5) Investments in debentures or bonds;
6) Investments in Mutual Funds;
7) Investments in partnership firms;
8) Other non-current investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate indicating
separately whether such bodies are
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) controlled special purpose entities in whom investments have been made and the nature
and extent of the investment so made in each such body corporate (showing separately
investments which are partly-paid). In regard to investments in the capital of partnership
firms, the names of the firms (with the names of all their partners, total capital and the shares
of each partner) shall be given.
Investments carried at other than at cost
should be separately stated specifying the basis for valuation thereof;
The following shall also be disclosed
1) Aggregate amount of quoted investments and market value thereof;
2) Aggregate amount of unquoted investments;
3) Aggregate provision for diminution in value of investments.

MCOM PART-II () Page 27


Long-term loans and advances
loans and advances shall be classified as:
1) Capital Advances;
2) Security Deposits;
3) Loans and advances to related parties (giving details thereof);
4) Other loans and advances (specify nature).
The above shall also be separately sub-classified as:
1) Secured, considered good;
2) Unsecured, considered good;
3) Doubtful.
Allowance for bad and doubtful loans and advances
shall be disclosed under the relevant heads separately.
Loans and advances due by directors or other officers of the company or any of them
either severally or jointly with any other persons or amounts due by firms or private
companies respectively in which any director is a partner or a director or a member
should be separately stated.

Other non-current assets


shall be classified as
1) Long-term Trade Receivables (including trade receivables on deferred credit terms);
2) Others (specify nature);
3) Long term Trade Receivables, shall be sub-classified as:
(i) Secured, considered good;
(ii) Unsecured, considered good;
(iii) Doubtful
Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
Debts due by directors or other officers of the company or any of them either severally or
jointly with any other person or debts due by firms or private companies respectively in
which any director is a partner or a director or a member should be separately stated.

7) Other
Current Investments
investments (specify
shall be classified as
nature).
1) Investments in Equity Instruments;
2) Investment in Preference Shares;
3) Investments in Government or trust securities:
MCOM PART-II () Page 28
4) Investments in debentures or bonds;
5) Investments in Mutual Funds;
6) Investments in partnership firms;
Under each classification, details shall be given of names of the bodies corporate (indicating
separately whether such bodies are i) Subsidiaries ii) associates iii) joint ventures, or (iv)
controlled special purpose entities) in whom investments have been made and the nature and
extent of the investment so made in each such body corporate (showing separately
4) Aggregate provision made for diminution in value of investments
investments which are partly paid). In regard to investments in the capital of partnership
firms, the names of the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
following shall also be disclosed:
1) The basis of valuation of individual investments
2) Aggregate amount of quoted investments and market value thereof;
3) Aggregate amount of unquoted investments;
Inventories
Inventories shall be classified as:
1) Raw materials;
2) Work-in-progress;
3) Finished goods;
4) Stock-in-trade (in respect of goods acquired for trading);
5) Stores and spares;
6) Loose tools;
7) Others (specify nature)
shall be stated
Goods-in-transit
Trade
shall be disclosed under the relevant sub-head of inventories
receivables
Mode of valuation
Shall separately state shall be sub-classified as
Aggregate amount of Trade Receivables outstanding for a period exceeding six months from
the date they are due for payment

MCOM PART-II () Page 29


Debts due by directors or other officers of the company or any of them either severally or
1) Secured, considered good;
2) Unsecured, considered good;
3) Doubtful.
Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
jointly with any other person or debts due by firms or private companies respectively in
which any director is a partner or a director or a member should be separately stated.

Cash and cash equivalents


shall be classified as
1) Balances with banks;
2) Cheques, drafts on hand;
3) Cash on hand;
4) Others (specify nature)

Earmarked balances with banks (for example, for unpaid dividend) shall be separately
stated
Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
Repatriation restrictions, if any, in respect of cash and bank balances shall be disclosed
separately.
Bank deposits with more than twelve months maturity shall be disclosed separately.

Short-term loans and advances


shall be classified as:
1) Loans and advances to related parties (giving details thereof);
2) Others (specify nature).
above shall also be sub-classified as
1) Secured, considered good;
2) Unsecured, considered good;
3) Doubtful.

Allowance for bad and doubtful loans and advances


shall be disclosed under the relevant heads separately

MCOM PART-II () Page 30


Loans and advances due by directors or other officers of the company or any of them
either severally or jointly with any other person or amounts due by firms or private
companies respectively in which any director is a partner or a director or a member
shall be separately stated

Other current assets (specify nature)


This is an all-inclusive heading,
which incorporates current assets that do not fit into any other asset categories

PART-II PROFIT & LOSS STATEMENT


Name of the Company..

Particulars Note No. Figures as at the Figures as at th


end of current end of the previ
reporting period reporting period

CONTINUING OPERATIONS (1)

I Revenue from operations (gross)

II Other income

III Total revenue (1+2)

VI Expenses
(a) Cost of materials consumed
(b) Purchases of stock-in-trade
(c) Changes in inventories of finished
goods, work-in progress and stock-in-
trade
(d) Employee benefits expense
(e) Finance costs
(f) Depreciation and amortisation
expense
(g) Other expenses

Total expenses

V Profit before exceptional and


extraordinary items and tax (III-IV)

VI Extraordinary items

VII Profit / (Loss) before extraordinary

MCOM PART-II () Page 31


items and tax (V+VI)

VIII Extraordinary items

IX Profit before tax (Vl (-/+)VIII)

X Tax expense:(I) Current tax expense for


current year
(II) Deferred tax

XI Profit / (Loss) from continuing


operations (IX+X)

XII Profit V(loss) from discontinuing


operations

XIII Tax expense of discontinuing


operations

XIV Profit/(loss) from Discontinuing


operations (after tax) (XII-XIII)

XV Profit (Loss) for the period (XI + XIV)

XVI Earnings per equity share:


(1) Basic
(2) Diluted

Pre-requisites of financial statements According to Section 129(1)


The financial statements shall-
i) give a true and fair view of the state of affairs of the company or companies,
ii) comply with the accounting standards notified under section 133 and
iii) shall be in the form or forms as may be provided for different class or classes of
companies in Schedule III
iv) However, the items contained in such financial statements shall be in accordance
with the accounting standards.
Here any reference to the financial statement shall include any notes annexed to or
forming part of such financial statement, giving information required to be given
and allowed to be given in the form of such notes under this act.

Authentication Of Financial Statements ( section 134)

MCOM PART-II () Page 32


Every Balance sheet and profit and loss Account must be approved and signed on behalf of
the board of directors of a company. Authentication means such approval and signing of the
final accounts by the directors. The final accounts must be signed by
a) The manager or secretary
b) The managing director and
c) Another director
If there is no managing director, another director has to sign in the place. If two
directors are not available in India then one director can sign the final accounts.
However he has to submit a signed statement to the registrar of companies along with
the final accounts why it was not possible to comply with the requirement.
The final accounts must be approved by the board of directors before they are signed on
behalf of the board in accordance with the provisions of this section and before they are
submitted to the auditors for their report thereon.
The primary responsibility of preparing the final accounts is that of the directors. Therefore
before the auditor can submit his report on the final accounts, they have to be approved and
signed on behalf of board of directors.

Audit report
The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statements which are required by or under the Companies Act,
2013, to be laid before the company in the general meeting.

The auditors report shall be issued after taking into account the

Provisions of Companies Act, 2013

Accounting and Auditing Standards

Matters which are required to be included in the audit report under the provisions of
Companies Act, 2013 or any rules made ( For e.g Companies (Audit and Auditors) Rules,
2014) or

Matters to be included based on any order made by Central Government in consultation


with the National Financial Reporting Authority.

Best of the information and knowledge available.

MCOM PART-II () Page 33


c. Finally, the auditor shall make a report to the members of the company, that the accounts,
financial statements give a true and fair view of the state of the companys affairs as at the
end of its financial year and profit or loss and cash flow for the year and such other matters as
may be prescribed.

Form of Auditors Report

ILLUSTRATIVE FORMAT OF INDEPENDENT AUDITORS REPORT ON THE


STANDALONE FINANCIAL STATEMENTS OF A COMPANY UNDER THE
COMPANIES ACT, 2013 AND THE RULES THEREUNDER

Circumstances include the following:

Audit of a complete set of standalone general purpose financial statements of a


company prepared under the Companies Act, 2013 financial reporting
framework.

The terms of audit engagement reflect description of managements


responsibility for the financial statements in SA 210, Agreeing the Terms of Audit
Engagement.

The independent auditor:

Has given an Unmodified Opinion in respect of true and fair view of the financial
statements; and

Has given Emphasis of Matter paragraphs in respect of:

A lawsuit against the Company, the result of which is uncertain.

A material uncertainty relating to going concern which has been adequately


disclosed in the notes to the financial statements.

In addition to expressing opinion on the true and fair view of the financial
statements, the auditor has other reporting responsibilities required under the
Companies Act 2013 and/or other regulatory requirements, including the
responsibility to report on internal financial controls pursuant to section 143(3)(i)
of the Companies Act 2013.

INDEPENDENT AUDITORS REPORT

MCOM PART-II () Page 34


TO THE MEMBERS OF ABC COMPANY LIMITED

Report on the Standalone Financial Statements

We have audited the accompanying standalone financial statements of ABC


COMPANY LIMITED (the Company), which comprise the Balance Sheet as at
31st March, 20XX, the Statement of Profit and Loss, the Cash Flow Statement for
the year then ended, and a summary of the significant accounting policies and
other explanatory information, [in which are incorporated the Returns for the
year ended on that date audited by the branch auditors of the Companys
branches at (location of the branches)]

Managements Responsibility for the Standalone Financial Statements

The Companys Board of Directors is responsible for the matters stated in


Section 134(5) of the Companies Act, 2013 (the Act) with respect to the
preparation of these standalone financial statements that give a true and fair
view of the financial position, financial performance and cash flows of the
Company in accordance with the accounting principles generally accepted in
India, including the Accounting Standards specified under Section 133 of the Act,
read with Rule 7 of the Companies (Accounts) Rules, 2014. 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; and design, implementation and maintenance
of adequate internal financial controls, that were operating effectively for
ensuring the accuracy and completeness of the accounting records, relevant to
the preparation and presentation of the financial statements that give a true and
fair view and are free from material misstatement, whether due to fraud or error

Auditors Responsibility

Our responsibility is to express an opinion on these standalone financial


statements based on our audit.

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 there under.

We conducted our audit in accordance with the Standards on Auditing specified


under Section 143(10) of the Act. Those Standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit involves performing procedures to obtain audit evidence
about the amounts and the disclosures in the financial statements. The
procedures selected depend on the auditors 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
financial control relevant to the Companys preparation of the financial
statements that give a true and fair view in order to design audit procedures that
are appropriate in the circumstances. An audit also includes evaluating the
appropriateness of the accounting policies used and the reasonableness of the

MCOM PART-II () Page 35


accounting estimates made by the Companys Directors, as well as evaluating
the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and


appropriate to provide a basis for our audit opinion on the standalone financial
statements.

Opinion

In our opinion and to the best of our information and according to the
explanations given to us, the aforesaid standalone financial statements give the
information required by the Act in the manner so required and give a true and
fair view in conformity with the accounting principles generally accepted in India,
of the state of affairs of the Company as at 31st March, 20XX, and its profit/loss
and its cash flows for the year ended on that date.

Emphasis of Matters

We draw attention to the following matters in the Notes to the financial


statements:

a) Note X to the financial statements which, describes the uncertainty related to


the outcome of the lawsuit filed against the Company by XYZ Company.

b) Note Y in the financial statements which indicates that the Company has
accumulated losses and its net worth has been fully / substantially eroded, the
Company has incurred a net loss/net cash loss during the current and previous
year(s) and, the Companys current liabilities exceeded its current assets as at
the balance sheet date. These conditions, along with other matters set forth in
Note Y, indicate the existence of a material uncertainty that may cast significant
doubt about the Companys ability to continue as a going concern. However, the
financial statements of the Company have been prepared on a going concern
basis for the reasons stated in the said Note.

Our opinion is not modified in respect of these matters.

Other Matter

We did not audit the financial statements/information of ________(number)


branches included in the standalone financial statements of the Company whose
financial statements / financial information reflect total assets of Rs.______ as at
31st March, 20XX and total revenues of Rs._______ for the year ended on that
date, as considered in the standalone financial statements. The financial
statements/information of these branches have been audited by the branch
auditors whose reports have been furnished to us, and our opinion in so far as it
relates to the amounts and disclosures included in respect of these branches, is
based solely on the report of such branch auditors.

Our opinion is not modified in respect of this matter.

Report on Other Legal and Regulatory Requirements

As required by Section 143 (3) of the Act, we report that:

MCOM PART-II () Page 36


(a) We have sought and obtained all the information and explanations which to
the best of our knowledge and belief were necessary for the purposes of our
audit.

(b) In our opinion, proper books of account as required by law have been kept by
the Company so far as it appears from our examination of those books [and
proper returns adequate for the purposes of our audit have been received from
the branches not visited by us.

(c) [The reports on the accounts of the branch offices of the Company audited
under Section 143 (8) of the Act by branch auditors have been sent to us and
have been properly dealt with by us in preparing this report.

(d) The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow
Statement dealt with by this Report are in agreement with the books of account
[and with the returns received from the branches not visited by us.

(e) In our opinion, the aforesaid standalone financial statements comply with the
Accounting Standards specified under Section 133 of the Act, read with Rule 7 of
the Companies (Accounts) Rules, 2014.

(f) The going concern matter described in sub-paragraph (b) under the Emphasis
of Matters paragraph above, in our opinion, may have an adverse effect on the
functioning of the Company.

(g) On the basis of the written representations received from the directors as on
31st March, 20XX taken on record by the Board of Directors, none of the directors
is disqualified as on 31st March, 20XX from being appointed as a director in
terms of Section 164 (2) of the Act.

(h) With respect to the adequacy of the internal financial controls over financial
reporting of the Company and the operating effectiveness of such controls, refer
to our separate Report in Annexure A.

(i) With respect to the other matters to be included in the Auditors Report in
accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in
our opinion and to the best of our information and according to the explanations
given to us:

i. The Company has disclosed the impact of pending litigations on its financial
position in its financial statements Refer Note XX to the financial statements;
[or the Company does not have any pending litigations which would impact its
financial position

ii. The Company has made provision, as required under the applicable law or
accounting standards, for material foreseeable losses, if any, on long-term
contracts including derivative contracts Refer Note XX to the financial
statements; [or the Company did not have any long-term contracts including
derivative contracts for which there were any material foreseeable losses.

iii. There has been no delay in transferring amounts, required to be transferred,


to the Investor Education and Protection Fund by the Company {or, following are
the instances of delay in transferring amounts, required to be transferred, to the

MCOM PART-II () Page 37


Investor Education and Protection Fund by the Company or there were no
amounts which were required to be transferred to the Investor Education and
Protection Fund by the Company.

For
XYZ & Co

Chartered Accountants
(Firms Registration No.)

Signature
(X
xxxx X. Xxxx)
(D
esignation11)
(Membership No. XXXXX)
Place of Signature:
Date:
Types of Auditors Reports

Unqualified Opinion

Often called a clean opinion, an unqualified opinion is an audit report that is issued when an
auditor determines that each of the financial records provided by the small business is free of
any misrepresentations. In addition, an unqualified opinion indicates that the financial records
have been maintained in accordance with the standards known as Generally Accepted
Accounting Principles (GAAP). This is the best type of report a business can receive.
Typically, an unqualified report consists of a title that includes the word independent. This
is done to illustrate that it was prepared by an unbiased third party. The title is followed by
the main body. Made up of three paragraphs, the main body highlights the responsibilities of
the auditor, the purpose of the audit and the auditors findings. The auditor signs and dates the
document, including his address.

Qualified Opinion

In situations when a companys financial records have not been maintained in accordance
with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion.
The writing of a qualified opinion is extremely similar to that of an unqualified opinion. A
qualified opinion, however, will include an additional paragraph that highlights the reason
why the audit report is not unqualified.

Adverse Opinion

MCOM PART-II () Page 38


The worst type of financial report that can be issued to a business is an adverse opinion. This
indicates that the firms financial records do not conform to GAAP. In addition, the financial
records provided by the business have been grossly misrepresented. Although this may occur
by error, it is often an indication of fraud. When this type of report is issued, a company must
correct its financial statement and have it re-audited, as investors, lenders and other
requesting parties will generally not accept it.

Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report. This may occur
for a variety of reasons, such as an absence of appropriate financial records. When this
happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firms
financial status could not be determined.

Reference

MCOM PART-II () Page 39