Revised Auditor Report: Key Changes (Applicable for the financial year 2018-19)
(Published in Chartered Accountants Association Ahmedabad May 2019 Journal)
Click Here to download Audit Report Format Private Limited Company 2018-19
The auditor’s report is the key deliverable communicating the results of the audit process. The Standard on Auditing (SA) 700 deals with the auditor’s responsibility to form an opinion on the financial statements. It also deals with the form and content of the auditor’s report, issued based on audit of the financial statements. In accordance with the revision in ISA 700 by The International Federation of Accountants, ICAI has made corresponding revisions to SA 700. Accordingly, the format of auditor’s report has been changed.
What are the Intended Benefits of revision in auditor report format?
- Enhanced communication between auditors and investors, as well as those charged with corporate governance
- Increased user confidence in audit reports and financial statements
- Increased transparency, audit quality, and enhanced information value
- Increased attention by management and financial statement preparers to disclosures referencing the auditor’s report
- Renewed auditor focus on matters to be reported that could result in an increase in professional skepticism
- Enhanced financial reporting in the public interest
The following Standards of Auditing have been revised and shall be effective/applicable for audits of financial statements for periods beginning on or after April 1, 2018 (deferred by one year from earlier date of April 1, 2017):
- SA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
- SA 705 Modifications to the Opinion in the Independent Auditor’s Report
- SA 706 Emphasis of Matter paragraph & Other matter Paragraph in Independent Auditor’s Report
- SA 720 The Auditor’s Responsibilities Relating to Other Information
COMPARISON OF AUDITOR’S REPORT: OLD V NEW
|Seq. No.||Old Format||New Format|
|1.||Title and Addressee||Title and Addressee|
|2.||Subtitle: Report on the Financial Statements||Subtitle: Report on the Audit of the Financial Stat.|
|3.||Introductory Paragraph||Auditor’s opinion (including introductory paragraph)|
|4.||Management’s Responsibility||Basis for opinion (mandatory)|
|5.||Auditor’s Responsibility||Emphasis matter (SA 706)|
|6.||Basis for modified opinion, if any||Material Uncertainty relating to Going Concern, if applicable (SA 570)|
|7.||Auditor’s opinion||Key Audit Matters, if applicable (SA 701)|
|8.||Emphasis of matter||Other Information if applicable (SA 720)|
|9.||Other matter||Management’s Responsibility|
|10.||Report on other legal and regulatory requirements||Auditor’s Responsibility for the Audit of the Financial Statements|
|11.||Signature, date of the report and membership number and place of signature||Other matter|
|12.||-||Report on other legal and regulatory requirements|
|13.||-||Signature, date of the report and membership number and place of signature|
KEY CHANGES IN AUDITOR’S REPORT
The most important part of the auditor’s report i.e. Opinion is now required to be positioned at the beginning of the audit report, followed by the Basis for Opinion.
2. Basis for Opinion (now Mandatory):
- The Basis for Opinion section previously was required only when the auditor’s opinion was modified. Now, this section will be required for all auditor’s reports and will explain that the audit was conducted in accordance with the SAs and whether the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion.
- The Basis for Opinion section will also include a new affirmative statement that the auditor is independent of the entity and has fulfilled the auditor’s other relevant ethical responsibilities relating to the audit, which includes the Code of Ethics issued by the ICAI together with the ethical requirements that are relevant to the audit of the financial statements under the provisions of the Companies Act, 2013 and the Rules thereunder.
3. Material Uncertainty relating to Going Concern (where applicable)
When a material uncertainty related to going concern exists and disclosure in the financial statements are adequate, than separate section “Material Uncertainty relating to Going Concern” is required with explanation. Earlier this was reported within an Emphasis of Matter Paragraph.
Illustrative Paragraph of Material Uncertainty relating to Going Concern:
We draw attention to Note XX 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 Company’s current liabilities exceeded its current assets as at the balance sheet date. These events or conditions, along with other matters as set forth in Note XX, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Also, following point may be included in Report on Other Legal and Regulatory requirements paragraph.
As required by Section 143(3) of the Act, we report that: (f) The going concern matter described in material uncertainty related to going concern paragraph above, in our opinion, may have an adverse effect on the functioning of the Company.
If the auditor concludes that there is a material uncertainty and the disclosure given in the financial statements are inadequate, the auditor should modify the audit report in accordance with the requirements specified in SA 705(Revised).
4. Key Audit Matters (mandatory for listed companies)
A new Key Audit Matters (KAMs) section for audits of listed entities and circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report; and when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report. The auditors have to describe in their public reports what they saw as the matters of most significance in the audit, and how those matters were addressed in the audit. The new Key Audit Matters section is the centerpiece of the revised auditor’s report, and the subject of a new separate standard, SA 701.
Extract from Raymond Limited 2018-19 Auditor Report
We have determined the matters described below to be the key audit matters to be communicated in our report.
Key audit matter
|How our audit addressed the key audit matter|
|Impairment testing of investments in joint venture|
Refer Note 5, 14 and 34 to the accompanying standalone financial statements As at 31 March 2019, the carrying amount of investment in a joint venture company viz. Raymond UCO Denim Private Limited (the ‘joint venture’) is ` 4,420.79 lakhs (net of provision for diminution in the value of investment of ` 13,800 lakhs). Further, the Company has also invested in preference share capital of the joint venture, the carrying amount of which as at 31 March 2019 is ` 8,378.19 lakhs.
The net worth of the joint venture as at 31 March 2019 is fully eroded. Management has considered that the losses suffered by the joint venture and erosion of its net worth indicates a possible impairment in the carrying value of investment.
Accordingly, the management has performed an impairment assessment and has estimated the recoverable amount of its investment in the joint venture using ‘Discounted Cash Flow valuation model’, which is complex and involves the use of significant management estimates and assumptions that are dependent on expected future market and economic conditions.
As per such assessment done by the management, the carrying value of the investment was impaired by ` 2,000 lakhs in the current year, as disclosed in Note 34 to the financial statements.
Considering the materiality of the amounts involved, the significant management judgement required in estimating the quantum of diminution in the value of investment and such estimates and judgements being inherently subjective, this matter has been identified as a key audit matter for the current year audit.Our procedures included, but were not limited to the following:
• Obtained an understanding of management’s process and evaluated design and tested operating effectiveness of controls around identification of indicators of impairment under Ind AS, and around valuation of the business of the joint venture to determine recoverable value of the said investment;
• Assessed the appropriateness of methodology and valuation model used by the management to estimate the recoverable value of investment in the joint venture;
• Assessed the professional competence, objectivity and capabilities of the valuation specialist engaged by the management;
• Assessed the reasonableness of assumptions relating to revenue growth rate, gross margins, discount rates etc. based on historical results, current developments and future plans of the business estimated by management using expertise of our valuation specialist on required parameters;
• Assessed cash flow forecasts to ensure consistency with current operations of the Company and performed sensitivity analysis on key assumptions used in management’s calculated recoverable value.
Based on our procedures, we also considered the adequacy of disclosures in respect of investment in the said joint venture in the notes to the standalone financial statements.
5. Other Information (where applicable)
A new section on Other Information (where applicable) in accordance with requirements of SA 720(Revised), The Auditor’s Responsibilities relating to other Information. Other information is referred as Financial or non-financial information (other than financial statements and the auditor’s report thereon) included in an entity’s annual report.
Examples of amounts and other items that may be included in other information:
- Items in a summary of key financial results, such as net income, earnings per share, dividends, sales and other operating revenues, and purchases and operating expenses.
- Capital expenditures by segment or division
- Explanations of critical accounting estimates and related assumptions
- Amounts involved in guarantees, contractual obligations, legal or environmental claims, and other contingencies
- Identification of related parties and descriptions of transactions with them.
- Explanations of critical accounting estimates and related assumptions.
- General descriptions of the business environment and outlook.
Extract from Infosys Limited 2017-18 Auditor Report
Information Other than the Standalone Financial Statements and Auditor’s Report Thereon
The Company’s Board of Directors is responsible for the preparation of the other information. The other information comprises the information included in the Management Discussion and Analysis, Board’s Report including Annexures to Board’s Report, Business Responsibility Report, Corporate Governance and Shareholder’s Information, but does not include the standalone financial statements and our auditor’s report thereon.
Our opinion on the standalone financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the standalone financial statements or our knowledge obtained during the course of our audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
6. Management’s Responsibility
This section of the auditor’s report is expanded to also identify those responsible for the oversight of the financial reporting process, when those responsible for such oversight are different from those who fulfill the responsibilities for preparing financial statements (in many cases, the audit committee). In this case, the heading of this section shall also refer to “Those Charged with Governance” or such term that is appropriate in the context of the legal framework applicable to the entity.
7. Auditor’s Responsibility
The detailed description of the auditor’s responsibilities is included in relation to specific matters, including fraud, internal control, accounting policies and accounting estimates, evaluating the overall presentation, structure and content of the financial statements and disclosures, group audits, and communications with those charged with governance.
Because of the increased length of this section, SA 700(Revised) includes a provision that certain components of this description may be presented in an appendix to the auditor’s report or, where law, regulation or applicable auditing standards expressly permit, by reference to a website of an appropriate authority.
EMPHASIS OF MATTER v. KEY AUDIT MATTER v. OTHER MATTER
Emphasis of Matter
Key Audit Matter
|A matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.||A matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.||Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period|
- § Change in significant accounting policy
- § Revenue recognition (measurement)
- § Future outcome of exceptional litigation
- § Impairment test
- Change in Auditor: previous year figures are audited by previous auditor
- Unaudited accounts of group entities in CFS
- Appointment of auditor post year end
- Asset Impairment
- Allowance for doubtful debt
- Goodwill impairment
- Valuation of inventories
- Fixed assets including depreciation
As there is a major change in the auditor report, the auditors need to be careful in first year while issuing audit report for the year 2018-19. In case of listed companies, special attention is required of reporting Key Audit Matters. Overall, the changes in the audit report is a welcome step and will enhance communication between auditors and stakeholders.