SA 700, SA 705, SA 706 & SA 720

CA Sunil S Kothari
23rd June 2012
1
AAS 28
SA 700 (R)
Auditor’s reports on all FS
Only general purpose FS
All kinds of opinions – clean,
modified, emphasis of matter
Only clean opinion
Deals with how to report on FS
Deals with how to -form an opinion
-report on FS (clean report)
(SA 800 – special purpose FS)
(SA 705 – modified, SA 706 – Emphasis
& Other Matter)
General purpose FS
General purpose
framework
Fair presentation
framework
Compliance with
framework + true and
fair opinion
Compliance
framework
No true and fair
opinion, only
compliance with
framework




Conclude on whether sufficient appropriate audit
evidence as per SA 330 was obtained
Conclude on whether uncorrected misstatements,
individually or in aggregate, are material as per SA 450
Evaluate whether FS are prepared, in all material
respects, as per applicable financial reporting
framework, including its qualitative aspects and freedom
from judgment bias
Evaluate whether accounting policies are appropriately
disclosed, consistently applied and are appropriate
Forming an opinion - requisites





Evaluate whether estimates are reasonable
Evaluate whether information presented is relevant,
reliable, comparable and understandable
Evaluate whether terminology used is appropriate
Evaluate whether disclosures are adequate to enable
users to clearly understand material transactions and
events
If reporting under a fair presentation framework, also
evaluate whether FS achieve a fair presentation based
on overall presentation, structure and contents; and
whether they represent underlying transactions/ events
befittingly
Forming an opinion - requisites

Ensure that the financial reporting framework is adequately
referred to
Based on all above conclusions/ evaluations, auditor finally
concludes whether the FS, as a whole, are free from material
misstatement due to fraud or error
AAS 28
SA 700 (R)
Paragraphs do not have
heading
Each paragraph has distinctive
heading
Responsibility statement is
brief
Management’s
responsibility
and auditor’s responsibility are
two separate paragraphs
All reporting is mixed up
Report
under
statute/
regulation follows true and
fair/ compliance opinion report
in separate section
AAS 28
Reference to auditing
standards made even if law/
regulation prescribes format
that does not meet structural
requirements of standard
SA 700 (R)
Reference to auditing
standards cannot be made
unless basic structure of
report meets requirements of
revised standard
The reporting under Indian
Reporting simultaneously
SAs and ISAs simultaneously
under Indian SAs and ISAs is
was not envisaged in existing permitted in single report
standard
AAS 28
SA 700 (R)
Auditor’s responsibility when
entity presents
supplementary info along
with FS is not addressed in
this
Standard lays down auditor’s
responsibility when entity
presents supplementary info
along with FS
Title: Auditor’s report
Independent auditor’s report
No separate management’s
responsibility paragraph
Separate and more elaborate
management’s responsibility
paragraph
AAS 28
SA 700 (R)
No separate auditor’s
responsibility paragraph
Separate and more elaborate
auditor’s responsibility
paragraph
Scope paragraph
No separate scope paragraph;
but contents are generally
covered in separate auditor’s
responsibility paragraph



Firstly, talks about Financial Statements (FS)audit
Then refers to CARO reporting (regulatory requirement, not
part of true and fair opinion reporting)
Then goes to specific matters required to be reported under
Companies Act – e.g., books of account, qualifications of
directors u/s 274(1)(g), etc. (regulatory requirement, not part of
true and fair opinion reporting)

Then reverts back to true and fair opinion on FS audit
Appears to users as if regulatory compliance is part of true and
fair opinion on FS


From start of report to opinion paragraph, the structure is
strictly restricted to the audit of the FS as performed under
either a fair presentation framework or a compliance
framework
All other matters that law / regulation requires to be part of
auditor’s report are put in a separate section of report below
the opinion paragraph
What is the logic?


The logic is that the true and fair part of the report is
governed by procedures performed by the auditor as per
auditing standards insofar as they pertain to audits of general
purpose financial statements
For instance, those audit procedures are designed to evaluate
whether the FS are prepared in accordance with the stated
financial reporting framework and are not materially
misstated due to fraud or error
What is the logic?


When we report on CARO, for example, we are responding to
specific queries under the said Order.
CARO report is a report on specific financial information that
may or may not be contained in the financial statements and
should, therefore, not be intermingled with the Opinion on the
financial statements because completely different audit
procedures are applied to provide a CARO report as versus the
procedures used to give a report on the financial statements
What is the logic?

Likewise, when we report on books of account, or
agreement of financial statements with books of
account, or on qualification of directors, we are
reporting on matters that are not really covered by our
Opinion on the financial statements

The existing standard says:
◦ “A statute governing the entity or a regulator may
require the auditor to include certain matters in the
audit report or prescribe the form in which the auditor
should issue his report. In such a case, the auditor
should incorporate in his audit report, the matters
specified by the statute or regulator and/or report in
the form prescribed by them in addition to the
requirements of this AAS.”


SA 700 says that unless auditor’s report contains, at a
minimum, the basic elements of an auditor’s report as per the
auditing standards, it would cease to be credible, lack
consistency and could mislead the user into making
inappropriate business decisions – thereby exposing the
auditor to significant risk
SA 210 mandates that if the auditor does not have the ability
to include relevant elements, such as the management’s
responsibility
paragraph,
the
auditor’s
responsibility
paragraph, etc., he may not refer to the audit having been
done in accordance with the SAs or auditing standards
generally applicable in India
Sufficient appropriate
audit evidence obtained
Sufficient appropriate
audit evidence
not obtained
Auditor concludes
that FS as a whole are not
free from material misstatement
Auditor is unable to conclude
whether FS as a whole are
free from material misstatement
Qualified
opinion
Adverse
opinion
Disclaimer
of opinion
Depends on auditor’s judgement of
Whether FS are
materially misstated
In absence of evidence
whether FS may be
materially misstated
Whether misstatement
is or is likely to be
pervasive
What is
PERVASIVE?
Misstatements
That are not confined
to specific components
accounts or items
Possible misstatements
If so confined,
represent a
substantial portion
Where pertaining to
disclosures, are
fundamental to users’
understanding of FS
After
obtaining
sufficient
appropriate
audit
evidence
Auditor
cannot
obtain
sufficient
appropriate
audit
evidence
Individual
misstatements
Auditor
concludes
that
OR
Aggregate of
misstatements
Auditor
concludes
that
Possible
effects of
undetected
misstatements
Are
MATERIAL
but not
PERVASIVE
QUALIFIED
OPINION
Are
MATERIAL
but not
PERVASIVE
After
obtaining
sufficient
appropriate
audit
evidence
Individual
misstatements
Auditor
concludes
that
OR
Are
MATERIAL
AND
PERVASIVE
Aggregate of
misstatements
ADVERSE
OPINION
Auditor
cannot
obtain
sufficient
appropriate
audit
evidence
Multiple
Uncertainties
Auditor
concludes
that
Auditor
concludes
that
Even after auditor has
obtained audit
evidence
Possible
effects of
undetected
misstatements
He cannot form
an opinion on FS
due to potential
interaction of the
uncertainties and
their possible
cumulative effect
Are
MATERIAL
AND
PERVASIVE
DISCLAIMER
OF
OPINION
After accepting
engagement,
management
imposes a
scope
limitation
Management does
not
remove it
Auditor requests
management to
remove the scope
limitation
Auditor assesses
that this may
result in a
qualified opinion
or disclaimer
Auditor communicates
this to Those charged with
governance (TCWG)
Considers alternative
procedures
If he cannot obtain
sufficient appropriate
audit evidence, and
concludes that
effect of undetected
misstatements is
QUALIFY
Material but not pervasive
Material and pervasive
RESIGN, if allowed to
GIVE DISCLAIMER
Nature of matter giving
rise to the modification
Auditor’s judgment about the
pervasiveness of the effects or
possible effects on FS
Material but not
pervasive
Material and
pervasive
Financial statements are
materially misstated
Qualified opinion
Adverse opinion
Inability to obtain sufficient
appropriate audit evidence
Qualified opinion
Disclaimer of
opinion

When expressing adverse opinion or disclaiming an
opinion on the FS as a whole the auditor cannot also
express an unmodified opinion on one or more specific
elements, accounts or items in the FS with respect to
the same financial reporting framework
Report to contain all elements per SA 700
+
Basis for modification paragraph
Just above
the Opinion
paragraph
Basis for
Qualified
Opinion
Heading to be
Basis for
Adverse
Opinion
Describing
matter of
modification
Basis for
Disclaimer
of Opinion
Describe and quantify
effect of misstatement
Describe
omitted
information
Say so if quantification
is impracticable
Adverse or
disclaimer
of opinion
expressed
But there are
other matters
that would
have required
modification
Non-disclosure
Discuss with
TCWG
Explain how
disclosures
are misstated
Explain reason why
sufficient appropriate
audit evidence
was unavailable
Reasons and effects
of such other matters
to be given in Basis
of Modification paragraph
If permitted
provide the
non-disclosed
information,
if practical
and if
sufficient
appropriate
audit evidence
is obtained
BASIS OF
MODIFICATION
PARAGRAPH

Heading
◦ “Qualified Opinion”, “Adverse Opinion” or “Disclaimer
of Opinion”

Qualified
opinion
misstatement
due
to
material
◦ In our opinion, except for the effects of matters
described in the Basis for Qualified Opinion paragraph
 The FS give true and fair view in accordance…
 The FS have been prepared, in all material respects, in
accordance with…

If qualified for inability to obtain sufficient
appropriate audit evidence
◦ ….except for the possible effects of the matters…

Requirements when the auditor expresses a Qualified
Opinion
o the auditor should state in the opinion paragraph that, in
the auditor’s opinion, except for the effects of the
matter(s) described in the Basis for Qualified Opinion
paragraph, the financial statements give a true and fair
view (or “present fairly, in all material respects”) in
accordance with the applicable financial reporting
framework
o When the modification arises from an inability to obtain
sufficient appropriate audit evidence, the auditor should
use the corresponding phrase “except for the possible
effects of the matter(s) ...” for the modified opinion

Requirements when the auditor expresses an Adverse
Opinion
o the auditor should state in the opinion paragraph that, in
the auditor’s opinion, because of the significance of
the matter(s) described in the Basis for Adverse Opinion
paragraph, the financial statements do not give a true
and fair view (or “do not present fairly”) in accordance
with the applicable financial reporting framework

Requirements when the auditor disclaims an opinion
o When the auditor disclaims an opinion due to an inability
to obtain sufficient appropriate audit evidence, the auditor
should state in the opinion paragraph that, because of
the significance of the matter(s) described in the
Basis for Disclaimer of Opinion paragraph, the auditor has
not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion and,
accordingly, the auditor does not express an opinion
on the financial statements

When the auditor expresses a qualified or adverse
opinion
o

Requires to state that the audit evidence obtained is
sufficient and appropriate to provide a basis for the
auditor’s modified audit opinion
When the auditor disclaims an opinion
o
Need to state that they were unable to obtain sufficient
appropriate audit evidence to provide a basis for an audit
opinion

The auditors need to communicate to those charged
with governance, the reasons and circumstances that
led to the expected modifications as well as the
proposed wording of the modification
◦ The Modified Opinion section of AAS 28 refers to
matters that affect the auditor's opinion and matters
that don't
◦ Matters that don't, are reported in an Emphasis of
Matter paragraph (EMP)
◦ EMP amounts to a modification of the auditor's
report, but does not affect the opinion
◦ EMP is placed in the report preceding the opinion
paragraph
◦ EMP is to be given where a going concern question is
not resolved and adequate disclosure is made
◦ EMP is to be given where there is a significant
uncertainty (other than going concern), whose
resolution depends on future events and which may
affect the FS – e.g. a lawsuit
◦ EMP is considered adequate in dealing with the above
except in extreme cases (e.g. situations involving
multiple uncertainties) where a disclaimer should be
given
Draw users’ attention to matters
presented/ disclosed in FS that are
fundamental to users’ understanding of
FS
Emphasis of
Matter
paragraph
(EMP)
Draw users’ attention to matters not
presented/ disclosed in FS that are
relevant to users’ understanding of the
audit, auditor’s responsibilities or
auditor’s report
Other Matter
Paragraph
(OMP)
EMP
OMP
Matters presented/ disclosed
in FS
Matters NOT presented/ disclosed in FS
Fundamental to users’
understanding
Relevant to users’ understanding
Understanding of FS
Understanding of the audit, auditor’s
responsibilities or auditor’s report
Has to be fundamental to users’
understanding
Auditor has obtained sufficient
appropriate audit evidence that matter
is not materially misstated in the FS
Matter referred to must be presented/
disclosed in FS
EMP is included immediately AFTER opinion
paragraph
Heading “Emphasis of Matter” is given
Reference to where matter emphasised can
be found in FS is given
Indicate that auditor’s opinion is NOT
MODIFIED in respect of matter emphasised
EMP: examples
◦ Uncertainty relating to future outcome of exceptional
litigation or regulatory action
◦ Early adoption and application of an accounting standard
that has pervasive effect on the FS
◦ Major catastrophe that has/ had/ continues to have
significant effect on the FS
EMP: other considerations
◦ Use of EMP should not be widespread and should not
include more information than what is presented/
disclosed elsewhere in FS
◦ EMP is not a substitute for
 A modified opinion (qualified/ adverse/ disclaimer)
 Disclosures that management should make
Matter has to be relevant to users’
understanding
Heading “Other Matter(s)” is given
Given only for users’ understanding of matters
related to the audit, auditor’s responsibilities
and auditor’s report
Such reporting is not prohibited by law or
regulation
Is placed after opinion para and any EMP in
report on FS, but may be placed in Other
Reporting Responsibilities section if its
contents relate to such responsibilities
• Users' understanding of audit
• Auditor appointed by law is unable to resign when
management imposes a pervasive scope limitation
• Users' understanding of auditor's responsibility or
auditor's report
• Law requires auditor to elaborate on matters that provide
further explanation of his responsibilities in the audit or the
auditor's report
Examples of circumstances necessitating OMP
• Reporting on > 1 set of FS
• If auditor is engaged to issue a report under Indian GAAP as
well as under IFRS, he may use OMP in each report to inform
users that he has also reported under another framework
◦ Restriction on distribution or use of report
• If special purpose FS are prepared in accordance with a
general purpose framework because such a framework meets
users' needs, auditor may use OMP to say that his report is
intended solely for the intended users and should not be
distributed/ used by others
What is the type of opinion in the following cases?
Case - 1

Inventories are misstated. Say it is 15 % of the profits for the year.
The misstatement is deemed to be material but not pervasive to
the financial statements.
Case – 2

The auditor was unable to obtain sufficient appropriate audit
evidence about multiple elements of the financial statements. That
is, say, the auditor was unable to obtain audit evidence about the
entity’s inventories and accounts receivable. The possible effects of
this inability to obtain sufficient appropriate audit evidence are
deemed to be both material and pervasive to the financial
statements.
◦ Qualified
The Company’s inventories are carried in the Balance Sheet at Rs. XXX. Management
has not stated the inventories at the lower of cost and net realisable value but has
stated them solely at cost, which constitutes a departure from the Accounting
Standards referred to in sub-section (3C) of section 211 of the Act. The Company’s
records indicate that had management stated the inventories at the lower of cost
and net realisable value, an amount of Rs. XXX would have been required to write
the inventories down to their net realisable value. Accordingly, cost of sales would
have been increased by Rs. XXX, and income tax, net profit and shareholders’ funds
would have been reduced by Rs. XXX, Rs. XXX and Rs. XXX, respectively.
Qualified Opinion
In our opinion and to the best of our information and according to the explanations
given to us, except for the effects of the matter described in the Basis for Qualified
Opinion paragraph, the 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:
48


Disclaimer of opinion
We were appointed as auditors of the Company after March 31, 20XX and thus could not observe
the counting of physical inventories at the beginning and end of the year. Accordingly, we were
unable to satisfy ourselves by alternative means concerning the inventory quantities held at
December 31, 20X0 and March 31, 20X1 which are stated in the Balance Sheet at Rs. XXX and
Rs. XXX, respectively. In addition, the introduction of a new computerized accounts receivable
system in September 20X1 resulted in numerous errors in accounts receivable. As of the date of
our audit report, management was still in the process of rectifying the system deficiencies and
correcting the errors. We were unable to confirm or verify by alternative means accounts
receivable included in the Balance Sheet at a total amount of Rs. XXX as at March 31, 20X1. As a
result of these matters, we were unable to determine whether any adjustments might have been
found necessary in respect of recorded or unrecorded inventories and accounts receivable, and
the elements making up the Statement of Profit and Loss and Cash Flow Statement.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion
paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.
49
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


Case 3
The auditor of ABC Ltd.
was unable to obtain sufficient
appropriate audit evidence regarding existence of investments in
XYZ Ltd in a foreign branch. The possible effects of the inability to
obtain sufficient appropriate audit evidence are deemed to be
material but not pervasive to the financial statement.
Case 4
You are the auditor of XYZ Ltd. There is uncertainty relating to a
pending exceptional litigation Matter – say there is a law suit filed
against the company for tax or some other matter. You cannot
conclude that it should be provided for.
◦ Qualified
ABC Company Limited’s investment in XYZ Company, a foreign company acquired during the year
and accounted as Held to maturity investment in Balance sheet of ABC company’ Ltd. We were
unable to obtain sufficient appropriate audit evidence about the existence of ABC Company
Limited’s investment in XYZ Company as at March 31, 20XX because we were denied access to
the financial information relating to the same, management, Consequently, we were unable to
determine whether any adjustments to these amounts were necessary.
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us,
except for the possible effects of the matter described in the Basis for Qualified Opinion
paragraph, the 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:
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◦ Emphasis of Matter paragraph
after opinion paragraph following shall be added:
“We draw attention to Note X to the financial statements which
describes the uncertainty related to the outcome of the lawsuit filed
against the Company by XYZ Company. Our opinion is not qualified
in respect of this matter
52


Case 5
In case of auditor of Consolidated Financial Statement, there are
certain subsidiaries which were not audited by him but which
form part of the consolidated financial statements under report.
Also the amounts involved are not insignificant.
◦ Other Matter paragraph
Other Matter
“We did not audit the financial statements of certain subsidiaries,
whose financial statements reflect total assets (net) of Rs. XXXX as
at March 31, 20XX, total revenues of Rs. XXXX and net cash
outflows amounting to Rs. XXXX for the year then ended. These
financial statements have been audited by other auditors whose
reports have been furnished to us by the Management, and our
opinion is based solely on the reports of the other auditors. Our
opinion is not qualified in respect of this matter.”
54
This SA deals with Auditor’s responsibility in relation to Other Information*
presented in documents (annual reports or similar document) containing audited
Financial Statements and the auditor’s report thereon.
*Other information may comprise for example:
A report by Management or those charged with governance on operations.
Financial Summaries or highlights.
Planned Capital expenditures.
Financial ratios.
The objective of the auditor is to respond appropriately when documents
containing audited financial statements and the auditor’s report thereon include
other information that could undermine the credibility of those financial
statements and the auditor’s report.
Reading Other Information
The Auditor shall make an appropriate arrangements with
Management or Those Charged with Governance, to provide such
other information, prior to the date of auditor’s report to the auditor.
Read such other information to identify Material Inconsistencies or
Material Misstatement of facts , if any with audited financial
statements.
MI observed in Other Information
Prior to Auditor’s Report Date
MI observed in Other Information
Subsequent to Auditor’s Report Date
- When revision of audited Financial
Statements is necessary & management
refuses, modify opinion in accordance with
SA-705.
- When revision of audited Financial
Statements is necessary, follow requirements
of SA-560 Subsequent Events.
-When revision of such Other Information is
necessary and management refuses,
communicate to TCWG and:
a) Include such matter in Emphasis of Matter
Para as per SA-706; OR
b) If possible, withdraw from engagement.
-When revision of such Other Information is
necessary and management makes such
changes, ensure steps taken by the
management.
-When management refuses to make changes
to other information, notify to TCWG & seek
legal opinion.
On observing the Material Misstatement, following actions can be taken
by an auditor:
a) Discuss the matter with management to evaluate the validity of the
management’s disclosures and after discussion with management,
auditor may conclude that valid differences of judgment or opinion
exists;
b) Request Management to consult qualified third party, such as legal
entity’s counsel and auditor shall consider such advice received;
c) If auditor feels that such misstatement needs correction and
management refuses for the same then auditor shall notify such
facts to TCWG and seek legal opinion from his own legal counsel.
Effective Date: This standard is effective from 1st April 2010