In: Accounting
7. In the context of the auditor's report, ISA 700 Forming an opinion and reporting on financial statements and ISA 701 communicating key audit matters in the independent auditor’s report explain the form and content of external audit reports. Required Critically discuss the contents of an unmodified Independent Auditor’s Report of a Rural Bank including key audit matters.
How to Form an Opinion on Financial Statements?
1. An auditor should form his/her opinion on such whether financial statements are prepared and presented, keeping in mind all the material respects, as per financial reporting frameworks as applicable
2. In forming his/her opinion, the auditor should determine as to whether he/she has gathered reasonable assurance whether financial statements overall are free of any material misstatement, whether due to error or fraud. Such conclusion should take into consideration
i. The conclusion of the auditor, as per SA 330, whether adequate appropriate audit evidence is obtained
ii. The conclusion of the auditor, as per SA 450, whether the incorrect misstatements are material, in aggregate or individually
iii. The evaluations as required by points 3-6 of the standard as mentioned below
3. An auditor must assess whether the financial statements are prepared and reported, in all the required material respects, as per the requirements of the relevant financial reporting framework. Such assessment must include consideration of qualitative aspects of accounting practices of the entity, which include indicators of potential bias in judgments of the management
4. Particularly, the auditor should do an assessment whether considering the requirements of relevant financial reporting frameworks:
i. That such financial statements appropriately disclose the important accounting policies that are selected and subsequently applied
ii. That the accounting policies which are selected and subsequently applied are in conformity with the relevant financial reporting framework
iii. That the accounting estimates which are made by management are rational
iv. That the information presented in financial statements is reliable, relevant, understandable and comparable
v. That such financial statements present sufficient disclosures allowing the users of the financial statements to properly understand the impact of material events and transactions on the information that is conveyed in financial statements
vi. That the terminologies used in financial statements, including the title of every financial statement, is apt
5. The evaluation of the auditor as to whether financial statements provide a true and fair presentation must include the consideration of:
i. The overall structure, presentation, and content of financial statements
AND
ii. Whether such financial statements, including related notes, exhibit underlying events and transactions in a manner which achieves a fair presentation.
6. Whether the financial statement refers to or describe the applicable financial reporting framework
Contents of External audit report
Auditor’s Report
Remaining other points are general but points 6-10 are explained below
6. Key Audit Matters
For audits of the complete sets of general purpose financial statements of a listed entity(s), the auditor should communicate the key audit matters in his/her report as per SA 701.
7. Management responsibilities for the Financial Statements
The auditor’s report should have a section with the heading “Responsibilities of Management for the Financial Statements.” The report of the auditor should use the term which is appropriate with respect to the legal framework relevant to such entity and isn’t required to specifically refer to “management”.
This section of auditor’s report should define the responsibilities of the management for:
1. Preparing financial statements as per relevant financial reporting framework, and for such internal controls as per the discretion of the management as deemed necessary for enabling the preparation and presentation of financial statements which are free from any material misstatements, irrespective of error or fraud
2. Evaluating the ability of the entity to continue as the going concern and whether the basis of the use of going concern is apt for accounting and disclosing, in case applicable, the matters related to going concern
8. Responsibilities of the Auditor for Audit of the Financial Statements
The auditor’s report should have a section with heading ‘Auditor’s Responsibilities for the Audit of the Financial Statements.’
This particular section of auditor’s report should
A. Prescribe the objectives of an auditor are to:
(i) Acquire reasonable assurance whether financial statements altogether are free from any material misstatement, irrespective of error or fraud
(ii) Issue the auditor’s report which includes auditor’s opinion
B. Prescribe that a reasonable assurance refers to the high level of assurance, however, it isn’t a guarantee that the audit conducted as per SAs would always identify material misstatements when it subsists; and
C. Mention that the misstatements could arise from error or fraud, and either
(i) State that error or fraud are considered material in the case, either individually or in aggregate, they might be expected to reasonably influence economic decisions of the intended users on basis of such financial statements
(ii) Give a definition of materiality as per the relevant financial reporting framework
The responsibilities of the auditor for the audit of financial statements section of his/her report also should:
A. Provide that he/she communicates with the person(s) charged with governance regarding, the intended scope and timing of such audit and noteworthy audit findings (if any), together with any significant flaws in the internal control which he/she identifies during the execution of such audit
B. Provide that the auditor offers person(s) charged with governance a statement that he/she has adhered to applicable ethical requirements with respect to independence and bring it to their notice all relationships and various other matters which could have a bearing on auditor’s independence
C. With respect to audits of financial statements of entities where key audit matters have been communicated as per SA 701, mention that, from the matters communicated with person(s) charged with governance, he/she concludes those matters which were of crucial nature in audit of financial statements of current period and are hence, the key audit matters
10. Other Reporting Responsibilities
In case an auditor addresses other responsibilities of reporting nature in his/her report on financial statements which are in addition to his/her responsibilities under SAs, such other reporting responsibilities should be provided separately as a section in his/her report with the heading titled ‘Report on Other Legal and Regulatory Requirements’. This includes reporting requirements as required under:
(i) CARO 2016 – Auditors of companies not falling under the specified list therein is required to report on compliance with certain matters laid there-under
(ii) IFC report – Auditors of companies not falling under the notified exemption list under Section 143(3)(i) have to now report on the establishment & functioning of Internal Financial Controls in every Company (Internal Financial Controls
Contents of unmodified Independent Auditor's Report:
All the points of Audit report remains the same but the points 3, 4 changes in above format
Opinion
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid 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 Rural Bank as at March 31, and its Profit/ Loss for the year ended on that date.
Basis of opinion:
The report of the auditor should have a section, immediately following Opinion section, with heading “Basis for Opinion”, which states that:
i. The audit was performed as per Standards on Auditing
ii. Refers to the section of the report of the auditor which describes responsibilities of the auditor under the SAs
iii. Includes the statement that an auditor is independent of an entity in as per the applicable ethical requirements with respect to the audit, and has fulfilled other ethical responsibilities pertaining to the auditor in as per these requirements
iv. States that whether an auditor believes that audit evidence which he/she has obtained is appropriate and adequate to provide a basis for his/her opinion
v. We have verified the loans sanctioned by the bank and Business Credits in excess of 2 Crores and Verified the Guarntee and security as well as collateral security of the loans
vi. We have verified the enhancement of the loans if any and physically verified on sampling basis, the guarantee of the loan i.e fixed assets or inventory on physically at client's place
vii. We have verified all the loans and FDs and are of true and fair view in confirmity as based on the scope of our audit
vii. We have mentioned in the LFAR(Long form of Audit report) regarding all the audit observations