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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:
(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.
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.
Internal 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.
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.
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.
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
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
5. Reperformance
6. Analytical Procedures
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.
External evidence is more reliable than internal evidence as of the absence of the
involvement of the client.
If the audit evidence is obtained from original documents then they are more reliable
rather than photocopies of it.
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.
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
The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence.
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
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.
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.
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.
(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
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:
4. Substantive procedures:
(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.
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.
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.
Form of Accounts
MCOM PART-II () Page 19
PART I- BALANCE SHEET
1) Shareholders Funds
(a) Share Capital
(b) Reserves and Surplus A
(c) Money received against share warrants B
Total
II.Assets
Total
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.
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.
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;
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.
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
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.
II Other income
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
VI Extraordinary items
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
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
Has given an Unmodified Opinion in respect of true and fair view of the financial
statements; and
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.
Auditors Responsibility
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.
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
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.
Other Matter
(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.
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
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