Sem 2 Audit Report

Unit 2 : Audit
Report and Audit
Certificate

Introduction
Government 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 Report
Audit 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 .

Importance
1. 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. Title
2. Addressee
3. Opening or Introductory Paragraph
4. Scope Paragraph
5. Opinion Paragraph
6. Date of Report
7. Place of Signature
8. 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 him
ii. On every balance sheet and profit and loss account
iii.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 standard
v. 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 Report
1. 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 Act
4. 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 Report
1. 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. Definition
2. Circumstances
3. Auditor’s Liabilities
4. Directors Explanation
5. Pressure
6. 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 Certificate
1. Meaning
2. Truth of details
3. Period
4. Qualified report
5. Provision
6. Details of report
7. To whom addressed

Sem 2 Audit Report

More Related Content

What's hot

Viewers also liked

Similar to Sem 2 Audit Report

More from Radhika Gohel

Recently uploaded

Sem 2 Audit Report