Analyzing the Auditor’s Report in India

June 10, 2014 Posted by India Briefing Reading Time: 4 minutes

By Tarun Manik

DELHI – The primary goal of an auditor is to express an opinion on whether the financial statements of a company are reasonably accurate and provide an adequate disclosure of transactions.

Auditors in India are bound to disclose the results of scrutinizing a company’s state of affairs and any factors that might undermine the integrity of financial statements through the Independent Auditor’s Report. This report lends a certain degree of credibility to figures reported by management. In contrast, unaudited financial statements have a higher probability of being misleading and fraudulent, and therefore are considered by investors to be unreliable when making decisions.

The content of an auditor’s report is primarily governed by the auditing standards prescribed in the Companies (Auditor’s Report) Order, 2003 (CARO). CARO outlines business areas on which observations are specifically required.

Although most companies, including foreign enterprises, are required to follow CARO regulations, there are some exceptions. CARO is not applicable to banking or insurance companies and, in the case of private companies, it is necessary to meet certain requirements to be exempt from fulfilling CARO regulations. Such companies should have paid up capital and reserves which do not exceed INR5 million (US$84,000), and private companies should not have any public deposits or loans from any bank or financial institution that exceed INR10 million (US$169,000). Finally, the turnover of a private company should be less than INR50 million (US$844,000). If these requirements are met, companies may be exempt from CARO.

Under CARO, an auditor’s report consists of introductory, scope and opinions paragraphs.

Introductory Paragraph – In this paragraph, the auditor introduces the entity’s audited financial statements. This section also presents statements of responsibility that outline management’s need to produce financial statements based on the appropriate accounting principles. The auditor is responsible to audit these financial statements in order to express a professional opinion.

Scope Paragraph – This paragraph describes the scope of the audit. In this section, the auditor should mention if the audit process was conducted in accordance with generally accepted standards in India. The auditor should determine the scope of audited financial statements based on the terms of the engagement. However, the terms of the engagement cannot restrict the scope of an audit in relation to matters which are prescribed by legislation or by the pronouncements of the institute.

Opinion Paragraph – The opinion paragraph of the auditor’s report indicates the financial reporting framework used to prepare the financial statements and the auditor’s opinion on whether the financial statements give a true and fair view of the company’s state of affairs. A true and fair view indicates that the auditor considered only those matters that have a material effect on the financial statements. In addition to an opinion on the true and fair view, the auditor’s report may include an opinion on whether the financial statements comply with other requirements specified by relevant statutes or law.

Upon analysis of the financial statements, auditors may form the following types of opinions:

A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed as the effect of any disagreement with management is not material and pervasive to such an extent that it is required by an adverse opinion. A qualified opinion should be expressed as a ‘subject to’ or ‘except for’ the effects of the matter to which the qualification relates.
A disclaimer of opinion is expressed when effect of the scope limitation is material and pervasive to such an extent that the auditor is not able to obtain sufficient audit evidence, and is therefore unable to express an opinion on the financial statements.
An adverse opinion is expressed when the effect of a disagreement on the financial statements is material and pervasive to such an extent that the auditor concludes that a qualification of the report is not adequate and can lead to the disclosure of a misleading or incomplete nature of the financial statements.

Whenever the auditor expresses an opinion other than unqualified, a clear description of all the substantive reasons should be included with, unless impractical, a quantification of the possible effect(s) on the financial statements mentioned in the report. In cases where it is not practical to quantify the effect of modifications made in the audit report accurately, the auditor may base their opinion upon estimates made by management after carrying out audit tests that clearly indicate the fact that the figures are based on management estimates. Usually, this information is presented in a separate paragraph preceding the opinion or disclaimer of opinion, and may include a reference to a more extensive discussion.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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