Unit 2 : Audit Report and Audit Certificate

IntroductionGovernment authorities may, under various

statutes or notifications, require reports or certificates from auditors in support of statements or other information prepared by an enterprise. Reports or certificates on specific matters may also be required from auditors by an enterprise, for its own special purposes.

Audit ReportAudit report is the presentation of collected and

considered facts. It is prepared in such a way that those people who do not have information about the matter of the report can be informed clearly in brief. According to Section 227 (2) of Companies Act, it is auditor’s duty to verify the accounts of the company carefully and give a report about whether the accounts present true and fair condition of the Company or not ?

Cont.Auditor is the representative of shareholders;

therefore it is his moral duty to take care of shareholders’ interest.

Generally, shareholders do not know the real condition of the company. They are not capable for it. So, auditor should verify whether the money of shareholders is properly managed ? that money is not used illegally or for personal purpose, the management is done according this.

Cont.He should minutely verify the accounts of that

company. Finally, he has to present in his report before shareholders whether the profit-loss account and balance sheet of the company gives true and fair economic condition of the company.

Let the auditor not add any new information in the presented accounts but the real importance lies in giving the report after verifying the truthfulness and clarity.

Meaning and Definition A report prepared by the auditor after examining the accounts

of a company is called Audit Report.

“A Report is a statement of collected and considered facts, so drawn up as to give clear and concise information to persons, who are not already in possession of the full facts of the subject matter of the report.”

Meaning and Definition The auditor's report is a formal opinion, or disclaimer thereof,

issued by either an internal auditor or an independent external auditor as a result of an internal or external audit or evaluation performed on a legal entity or subdivision thereof .

Importance1. Importance to the share holders:2. Importance to the Directors:3. Importance to the Creditors of the Company:4. Importance to the Debenture holder of the Company:5. Importance to the Investors:6. Importance to the Government:7. Importance to the IT department:

Basic Elements of the Auditor’s Report

1. Title2. Addressee3. Opening or Introductory Paragraph4. Scope Paragraph5. Opinion Paragraph6. Date of Report7. Place of Signature8. Auditor’s Signature

Contents of Audit Report According to Section 227(2) an audit report requires an auditor

to the members of the company:i. On accounts examined by himii. On every balance sheet and profit and loss accountiii.On every other document declared by this Act to be part of

annexed to the balance sheet or profit and loss a/c which are laid before the company in general meeting during his tenure of office

iv.The report shall state whether, in his opinion and to the best of his information and according to the explanations given to him.

Cont.v. Give a true and fair view :

a. Balance sheet b. Profit and loss account

According to Section 227(3) the following matters have to be specified in Audit Report by the auditor:

i. Whether he has obtain all the information and explanations which to the best of his knowledge….

ii. Whether proper books of a/c as required by law have been kept by company

iii. Whether proper returns adequate for the purpose of his audit have been received from the branches not visited by him…

Cont.iv. Whether in his opinion the profit and loss a/c and balance

sheet comply with the accounting standardv. Whether any director is disqualified from being appointed as

director vi. Whether the balance sheet exhibits a true and fair view of te

state of affairs of the company and whether the P & L a/c reflects the true profit or loss of the company.

If the answer to any of the above questions is in negative or is with a qualification, the auditor should state it in his report.

Points to be considered while preparing the Audit

Report1. The report should be addressed to the shareholders…2. The report should bear the date of signing by the auditor 3. The report should be drafted in accordance with the

requirements of the Companies Act4. The audit report should bring to the notice of shareholders all

important matters and his report should be constructive and suggestive as well.

5. The report should contain factual information.– Unbiased, impact and brief – Too lengthy report difficult for shareholders to understand

Cont.6. The auditor should prepare the report in his own office.7. All the working papers and queries with explanations should

be carefully studied before the final report is prepared.8. Signature of an Auditor must be manually signed.9. As soon as the report is ready in all respect, the same should

be promptly forwarded to the company.

True and Fair Concept After verifying accounts of the company, Auditor has to give a

report whether the accounts of the company present “true and fair” economic condition of the company or not ? In that case, it is necessary to understand what the meaning of words is “true and fair”.

It can be said that the accounts of the company show “true and fair” economic condition of the company only when accounts have been prepared according to the accounting principles and accounting methods, capital and revenue transactions have been allocated properly, information is given according to the second part of residual-6 of Companies Act, total information is given as per provisions of law and shown in law.

Cont. All the assets and liabilities of the company shown in the

balance sheet of the annual accounts are presented properly, means no assets or liabilities of the company have been left, or have not been shown wrong, its valuation has been done according to the accepted principles, there is provision or depreciation on fixed assets, contingent liability is shown with provision regarding it. Thus, if the real condition of assets and liabilities shown in the balance sheet, it is called “true and fair” condition.

Cont. We can say that fair and true profit is shown in profit-loss

account only when profit has been calculated after adjusting in necessary from according to Companies Act and Profit-Loss account has been prepared according to the principles of accounting and provision of Companies Act.

Account of allocation of profit-loss should have been prepared properly; necessary amount should have been carried to the reserve account, provision for depreciation, bad debt reserve, reserve discount, tax reserve etc. should have been properly arranged.

Cont. If profit and loss account has been affected due to change in

the methods of depreciation, along with above, it is to be seen whether the entries related to pre-paid expenses, bill receivable, bills payable or income received have been properly posted or not.

The presentation done through accounts on the circumstances discussed above is true, transparent and fair and at that time auditor’s certificate regarding accounts will present “true and fair” economic condition in its real sense.

Cont. The use of words “true and fair” started with the

implementation of Companies Act in 1956. Before that, words “true and correct” were used. These words were used since the implementation of Companies Act of 1913. The meaning of “true and correct” is that the basis on which the annual accounts have been prepared matches with the books of accounts. In this sense.

Annual accounts show true and correct condition of the company. “True and fair” words are used in this extensive sense.

Cont. The meaning of “true and fair” is extensive. Annual accounts

are true only with reference to books of accounts. Not only are these accounting books also truly transparent but transactions in it are regarding business; are authentic, true and written truly. In this sense, fairness of transactions is presented by words “true and fair”.

Types of Audit Report1. Clean Report:

If no defect, illegal act, frauds are detected during the verification of the accounts of the company and if profit and loss account in the annual account of the company presents true and fair profit or loss and balance sheet shows true and fair economic condition as of the date and auditor presents whatever report are called clean report. Clean report is also called Report Without Defect or Routine Report or Regular Report.

2. Qualified Report:

During the verification of the accounts of the company, any defect, illegal act, frauds, breach of provision of law is detected and the profit loss account does not show true and reasonable profit or loss of the concluding year and balance sheet does not show the true and fair economic condition as of that date, when auditor gives report about it is called qualified audit report. This type of audit is also called Improved Report or Limited Report.

Cont.In the following circumstances, the auditor should give qualified report:

(1)When accounts, financial registers etc. are not prepared according to the accepted principles of Accounting.

(2) When it is not possible to verify accounts according to accepted principles of auditing.

(3) Where the auditor is not given enough books of accounts, certificates, vouchers and necessary information and explanations.

Cont.(4) When Account books are not maintained as per the provisions of

Companies Act.

(5) When profit-loss account and balance sheet, profit-loss allocation accounts have not been prepared as per Companies Act.

(6) Including management, if any person has committed breach of provisions of articles, memorandum, provision of Companies Act, qualified report should be given.

Cont.If auditor ascertains that company’s balance sheet does

not present true and fair economic condition and profit-loss account does not present true and fair financial picture, in circumstances like –

(i) More or insufficient provision of depreciation on fixed assets.(ii) If there is an adverse effect on profit-loss account because of

change in the method of depreciation.(iii) More or insufficient provision for bad debts, bad-debt reserve

has been made.(iv) Assets shown in the balance sheet are assessed at low price or

more price etc. Auditor should present qualified report.

Distinguish between Clean Report and Qualified Report

1. Definition2. Circumstances3. Auditor’s Liabilities4. Directors Explanation5. Pressure6. Impression of Reader

Audit Certificate“A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion.”

It is a guarantee of absolute accuracy and correctness of the information contained in it. The information contained in it is based on the documentary evidence made available to the auditor.

Significance of Audit Certificates

1. Regarding prospectus:2. Regarding Statutory Report:3. For exercising control by the Government:4. At the time of liquidation:5. In respect of other matters:

Distinguish between an Audit report & Audit

Certificate1. Meaning2. Truth of details3. Period4. Qualified report5. Provision6. Details of report7. To whom addressed

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