SA 700 and CARO 2015
Presented by:
Khushroo B. Panthaky
Senior Partner
Walker Chandiok & Co LLP
Chartered Accountants
Presented For: Pune Branch of WIRC
14 June 2015
Agenda
• Standard on Auditing 700 (Revised) on Forming an
Opinion and Reporting on Financial Statements
• CARO 2015 – As part of the Audit Report
Standard on Auditing (SA) 700 (Revised)
Forming an Opinion and Reporting
on Financial Statements
Introduction
• Earlier known as SA 700 (AAS 28), “ The Auditor’s Report on Financial
Statements”
• Deals with auditor’s responsibility to form an opinion on the financial
statements (FS)
• Deals with form and content of the auditor’s report issued on General
Purpose FS
• Promotes consistency in the auditor’s report which enables global
acceptance of the auditor’s report
• Consistency also helps promote user’s understanding and identify
unusual circumstances when they occur
• Effective for audits of FS for periods beginning on or after April 1, 2012
Objectives of the Auditor
• Form an opinion on the FS based on an evaluation of the conclusions
drawn from the audit evidence obtained
• Express clearly the above opinion through a written report that also
describes the basis for the opinion
Key Definitions
• General Purpose FS – includes Balance Sheet, Statement of Profit and
Loss, Cash Flow Statement (where applicable) and statements and
explanatory notes which form part thereof, issued for the use of
various stakeholders, Government and their agencies and the
public
• General purpose framework – A financial reporting framework
designed to meet the common financial information needs of a wide
range of users. The financial reporting framework may be a fair
presentation framework or a compliance framework
• Unmodified opinion – The opinion expressed by the auditor when the
auditor concludes that the FS are prepared, in all material respects, in
accordance with the applicable financial reporting framework
Key Definitions
• Fair presentation framework - A financial reporting framework that
requires compliance with the requirements of the framework and
acknowledges that:
(i)
To achieve explicitly or implicitly the fair presentation of the
financial statements, it may be necessary for management to
provide disclosures beyond those specifically required by the
framework; or
(ii) It may be explicitly necessary for management to depart from a
requirement of the framework to achieve fair presentation of the
financial statements. Such departures are expected to be
necessary only in extremely rare circumstances
Key Definitions
• Compliance framework - A financial reporting framework that requires
compliance with the requirements of the framework, but does not contain
the acknowledgements in (i) or (ii) above
• Reference to “Financial Reporting Standards” in this SA means the
Accounting Standards promulgated by the Accounting Standards
Board (ASB) of the ICAI or Accounting Standards, notified by the Central
Government by publishing the same as the Companies (Accounting
Standards) Rules, 2006, or the Accounting Standards for Local Bodies
promulgated by the Committee on Accounting Standards for Local Bodies
(CASLB) of the ICAI, as may be applicable
Forming an opinion on the Financial Statements
• Opinion on whether the FS are prepared, in all material respects, in
accordance with the applicable financial reporting framework
• The auditor shall conclude as to whether he has obtained reasonable
assurance about whether the FS as a whole are free from material
misstatement, whether due to fraud or error. That conclusion shall take
into account:
(a) The auditor’s conclusion whether sufficient appropriate audit
evidence has been obtained
(b) The auditor’s conclusion, whether uncorrected misstatements
are material, individually or in aggregate; and
(c) The required evaluations (summarised in subsequent slides)
Forming an opinion on the Financial Statements
The auditor shall EVALUATE
• whether the FS are prepared, in all material
respects, in accordance with the requirements
of the applicable financial reporting framework
• qualitative aspects of the entity’s accounting
practices, including indicators of possible bias
in management’s judgments
Forming an opinion on the Financial Statements
The auditor shall also evaluate whether, in view of the requirements of the
applicable financial reporting framework:
(a) The FS adequately disclose the significant accounting policies
selected and applied
(b) The accounting policies selected and applied are consistent with
the applicable financial reporting framework and are
appropriate
(c) The accounting estimates made by management are reasonable
Forming an opinion on the Financial Statements
(d) The information presented in the FS is relevant, reliable,
comparable and understandable
(e) The FS provide adequate disclosures to enable the intended users
to understand the effect of material transactions and events on
the information conveyed in the FS; and
(f) The terminology used in the FS, including the title of each FS, is
appropriate
Forming an opinion on the Financial Statements
In accordance with the fair presentation framework,
the auditor shall evaluate whether the FS achieve
fair presentation, including consideration of:
a) The overall presentation, structure and
content of the FS; and
b) Whether the FS, including the related notes,
represent the underlying transactions and
events in a manner that achieves fair
presentation
The auditor shall also evaluate whether the FS adequately refer to or describe
the applicable financial reporting framework
Form of Opinion
Unmodified Opinion
When the auditor concludes that the FS are prepared, in all material
respects, in accordance with the applicable financial reporting
framework
Form of Opinion
Modified Opinion (SA 705) – Under what circumstances
When the auditor concludes that based on audit evidence obtained, the
FS as a whole are ‘not free’ from material misstatement; or
Is unable to obtain sufficient appropriate audit evidence to conclude
that the FS as a whole are free from material misstatement
Form of Opinion
Modified Opinion (SA 705)
• If FS do not achieve fair presentation, the auditor shall discuss the matter
with management and, accordingly determine the need for modified
opinion
• When the FS are prepared using the compliance framework, evaluation
of fair presentation is not required. However, if under extremely rare
circumstances, the auditor concludes that such FS are misleading, the
auditor shall discuss the matter with management and accordingly
communicate it in the auditor’s report
Auditor’s report
• Shall be in writing
• Shall have a title clearly indicating report of an independent auditor
• Shall be addressed as required by the circumstances of the
engagement
• The introductory paragraph in the report shall:
(a) Identify the entity whose FS have been audited;
(b) State that the FS have been audited;
(c) Identify the title of each statement that comprises the FS;
(d) Refer to the summary of significant accounting policies and other
explanatory information; and
(e) Specify the date or period covered by each statement comprising
the FS.
Auditor’s report
– Management’s Responsibility section
• The auditor’s report need not refer specifically to “management”, but
shall use the term that is appropriate in the context of the legal and/or
regulatory framework applicable to the entity. In case of some entities, the
appropriate reference may be to Those Charged With Governance (TCWG)
• The auditor’s report shall include a section with the heading "Management’s
[or other appropriate term] Responsibility for the Financial Statements"
• Management’s responsibility for the preparation of the FS is described in the
terms of the audit engagement. The description shall include an explanation
that management is responsible for the preparation of the FS
• This responsibility includes the design, implementation and maintenance
of internal control relevant to the preparation of FS that are free from
material misstatement, whether due to fraud or error
Auditor’s report
– Management’s Responsibility section
• Where the FS are prepared in accordance with a fair presentation
framework, the explanation of management’s responsibility for the FS
shall refer to “the preparation and fair presentation of these FS” or "
the preparation of financial statements that give a true and fair
view"
Auditor’s report
– Auditor’s Responsibility section
• The auditor’s report shall include a section with the heading “Auditor’s
Responsibility”
• It shall state that the responsibility of the auditor is to express an
opinion on the FS based on the audit
• It shall state that the audit was conducted in accordance with Standards
on Auditing issued by the ICAI. It shall also explain that those
Standards require that the auditor comply with ethical requirements and
that the auditor planned and performed the audit to obtain reasonable
assurance about whether the FS are free from material misstatement
Auditor’s report
– Auditor’s Responsibility section
• It shall describe an audit by stating that:
a) An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the FS;
b) The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the
FS, whether due to fraud or error
c) In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation of the FS in order to
design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control
Auditor’s report
– Auditor’s Responsibility section
d. In circumstances when the auditor also has a responsibility to
express an opinion on the effectiveness of internal control in
conjunction with the audit of the FS, the auditor shall omit the
phrase that the auditor’s consideration of internal control is not for
the purpose of expressing an opinion on the effectiveness of internal
control; and
e. An audit also includes evaluating the appropriateness of the
accounting policies used and the reasonableness of accounting
estimates made by management, as well as the overall
presentation of the FS
Auditor’s report
– Auditor’s Responsibility section
• Where the FS are prepared in accordance with a fair presentation
framework, the description of the audit in the auditor’s report shall refer to
“the entity’s preparation and fair presentation of the FS” or "the
entity's preparation of financial statements that give a true and fair
view"
• It shall state whether the auditor believes that the audit evidence obtained
is sufficient and appropriate to provide a basis for the auditor’s opinion
Auditor’s opinion
• The auditor’s report shall include a section with the heading “Opinion”
• When expressing an unmodified opinion on FS prepared in accordance
with a fair presentation framework, the auditor’s opinion shall, unless
otherwise required by law or regulation, use one of the following phrases,
which are regarded as being equivalent:
a) The FS present fairly, in all material respects, in accordance with
[the applicable financial reporting framework]; or
b) The FS give a true and fair view of ------- in accordance with [the
applicable financial reporting framework]
•
When expressing an unmodified opinion on FS prepared in accordance
with a compliance framework, the auditor’s opinion shall be that the FS
are prepared, in all material respects, in accordance with [the applicable
financial reporting framework]
Other Reporting Responsibilities
– Separate from the Audit Report
• If the auditor addresses other reporting responsibilities
in the auditor’s report in addition to the responsibility
under the SAs, these shall be in a separate section in
the auditor’s report and sub-titled “Report on Other
Legal and Regulatory Requirements,” or otherwise as
appropriate to the content of the section
• The “Report on Other Legal and Regulatory
Requirements” shall follow the “Report on the Financial
Statements.”
• The separate section helps clearly distinguish them
from the auditor’s responsibility under the SAs
Other Requirements on Auditor’s report
• The auditor’s report shall be signed in the personal name with
membership number and the name of the audit firm with registration
number
• The auditor’s report shall be dated no earlier than the date on which the
auditor has obtained sufficient appropriate audit evidence on which to
base the auditor’s opinion on the FS, including evidence that:
a) All the statements that comprise the FS, including the related notes,
have been prepared; and
b) Those with the recognised authority have asserted that they have
taken responsibility for those FS.
• The auditor’s report shall name specific location, which is ordinarily the
city where the audit report is signed
Auditor’s report for audits conducted in
accordance with SA and ISA
In addition to compliance with SAs, the auditor may additionally have
complied with the International Standards on Auditing (ISAs). In such
circumstances, the auditor’s report may refer to ISAs in addition to the
SAs, but the auditor shall do so only if:
a) There is no conflict between the requirements in SAs and those in
ISAs that would lead the auditor (i) to form a different opinion, or (ii)
not to include an Emphasis of Matter paragraph that, in the
particular circumstances, is required by ISAs; and
b) The auditor’s report includes, at a minimum, each of the elements
set out in the previous slide when the auditor uses the layout or
wording specified by the SAs. Reference to law or regulation shall
be read as reference to the SAs. The auditor’s report shall thereby
identify such SAs.
Reference to more than one Financial Reporting
Framework
• In some cases, the FS may represent that they are prepared in
accordance with two financial reporting frameworks (e.g., the national
framework and IFRS). This may be because management is required or
has chosen to prepare the FS in accordance with both frameworks
• Such description is appropriate only if the FS comply with each of the
frameworks individually and simultaneously without any need for
reconciling statements
Material Modifications vis-à-vis ISA 700 – ‘Forming
an Opinion and Reporting on Financial Statements’
• Financial Reporting Standards for ISA 700 explains what constitutes IFRS
whereas for SA 700, it represents Accounting Standards promulgated by
the Accounting Standards Board (ASB) of ICAI, notified by the Central
Government under The Companies Act.
• ISA 700 states that the auditor’s report shall name the location in the
jurisdiction where the auditor practices. In India, the international
requirement of mentioning the auditor’s address has been replaced with
the place of signature, which is the name of the specific location,
ordinarily the city where the audit report is signed
• ISA 700 explains who is eligible for signing the auditor’s report in different
situations. In India, audit report is signed in the personal name of the
auditor and in the name of the audit firm. The partner/proprietor signing
the audit report also needs to mention the firm registration number,
wherever applicable, and the membership number assigned by ICAI
Audit Report and Reporting under
CARO 2015
POWERS AND DUTIES OF AUDITOR U/S 143 OF
COMPANIES ACT, 2013
•
Section 143(1): Make enquiries during audit
•
Section 143(2): Prepare report to members of company on the accounts and
financial statements.
•
Section 143(3): Matters to be reported in audit report.
(a) Obtain information & explanation to the best of his knowledge,
(b) Maintenance of proper books of accounts,
(c) Report of accounts of branch office of a company,
(d) Balance sheet and P& L dealt are in agreement with books of accounts,
(e) Compliance of Accounting Standards,
(f ) Observations or comments having adverse effect on functioning of company,
(g) Disqualification of any director,
(h) Any qualification, reservation or adverse remark on maintenance of accounts.
REPORTING U/S 143(3)(F) OF COMPANIES
ACT,2013
RELEVANT EXTRACT
“The auditor’s report shall also state(f) The observations or comments of the auditors on financial statements or
matters which have any adverse effect on the functioning of the company,”
Observation/Comments
Modification to auditor
opinion / emphasis of
matter
Qualified or Adverse or
Disclaimer of opinion
REPORTING U/S 143(3)(H) OF COMPANIES
ACT,2013
RELEVANT EXTRACT
“The auditor’s report shall also state(h) Any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith.”
‘Books of Accounts’ include:
• Sums of money receipts and expenditure,
• Sales and purchases of goods and services,
• Assets and liabilities,
• Items of cost u/s 148 in the case of a company which belongs to any class
of companies specified.
APPLICABILITY OF CARO
Every Company including a foreign Company as per section 2(42) of
Companies Act,2013 except
1.
A banking company
2. An insurance company
3. Non-Profit company (Section 8 of Companies Act,2013);
4. A One Person Company;
5. A private limited company with
a) paid up capital and reserves not more than INR 50 lakhs and
b) does not have loan outstanding exceeding INR 25 lakhs from any
bank or financial institution and;
c) does not have turnover exceeding INR 5 crore at any point of
time during the financial year.
KEY HIGHLIGHTS OF CARO 2015
The erstwhile CARO 2003 has been replaced by CARO 2015 and it shall
apply for the FY commencing on or after 1 April 2014.
Key highlights of CARO 2015 are as follows:
‒ The new order contains 12 clauses as against 21 clauses under the erstwhile order.
‒ New class of companies introduced under the Act 2013, e.g. One Person
Companies (‘OPC’) and Small Companies;
‒ Deleting those clauses for which the reporting under CARO would no longer be
relevant, since the corresponding provisions/ requirements are introduced under the
Act 2013 itself
‒ Adding those provisions which were introduced or amended over the period; e.g.
reporting on VAT for statutory dues reporting;
KEY AMENDMENTS
CARO 2003
(i) Fixed Assets
a) Whether the company is maintaining proper records
showing full particulars, including quantitative details
and situation of fixed assets;
b) Whether these fixed assets have been physically
verified by the management at reasonable intervals;
whether any material discrepancies were noticed on
such verification and if so, whether the same have
been properly dealt with in the books of account;
c) If a substantial part of fixed assets have been disposed
off during the year, whether it has affected the going
concern.
(ii) Inventory
CARO 2015
(i) Fixed Assets
---------No Change--------
---------No Change--------
---------Deleted--------(ii) Inventory - No change
KEY AMENDMENTS
CARO 2003
(iii) Loans covered u/s 301 of Co’s Act,1956
(a) Has the company granted any loans, secured or unsecured
to companies, firms or other parties covered in the register
maintained under section 301 of the Act. If so, give the number of
parties and amount involved in the transactions.
CARO 2015
(iii) Loans u/s 189
of Co’s Act, 2013
Deleted : The
requirement on
disclosure of
number of parties
and amount of loans
(b) Whether the rate of interest and other terms and conditions of granted (secured or
loans given by the company, secured or unsecured are prima
unsecured to
facie prejudicial to the interest of the company.
companies, firms or
other parties
(e) Has the company taken any loans, secured or unsecured
covered in the
from companies, firms or other parties covered in the register
register maintained
maintained under section 301 of the Act. If so, give the number of under section 189 of
parties and amount involved in the transactions.
the Companies
Act,2013)
KEY AMENDMENTS
CARO 2003
(iii) Loans covered u/s 301 of Co’s
Act,1956
(f) whether the rate of interest and other
terms and conditions of loans taken by the
company, secured or unsecured are prima
facie prejudicial to the interest of the
company.
(iv) Internal Control System
(v) Loans covered u/s 301 of Co’s
Act,1956
CARO 2015
(iii) Loans u/s 189 of Co’s Act, 2013
---------Deleted---------
(iv) Internal Control System- No Change
---------Deleted---------
KEY AMENDMENTS
CARO 2003
CARO 2015
(vi) Deposits
(v) Deposits
In case the company has accepted
deposits from the public, whether the
directives issued by the Reserve Bank of
India and the provisions of Sections 58A
and 58AA of the Act and the rules framed
there under, where applicable, have been
complied with. If not, the nature of
contraventions should be stated; If an
order has been passed by Company Law
Board or National Company Law Tribunal
or Reserve Bank of India or any other
Tribunal. Whether the same has been
complied with or not?
Reference to Sections 58A and
58AA of Co’s Act, 1956 changed to
the provisions of Sections 73 to 76
or any relevant provisions of the
Companies Act 2013.
KEY AMENDMENTS
CARO 2003
CARO 2015
(vii) Internal Audit System
In case of listed companies and/ or
---------Deleted--------other companies having a paid up
capital and reserves exceeding Rs.
50 lakhs as at the commencement of
the financial year concerned, or
having an average annual turnover
exceeding five crore rupees for a
period of three consecutive financial
years immediately preceding the
financial year concerned, whether
the company has an internal audit
system commensurate with its size
and nature of its business;
(viii) Cost Records
(vi) Cost Records - No Change
KEY AMENDMENTS
CARO 2003
CARO 2015
(ix) Statutory Dues
(vii) Statutory Dues:- VAT Included
Is the company regular in depositing
undisputed statutory dues including
Provident Fund, Investor Education and
Protection Fund, Employees’ State
Insurance, Income-tax, Sales-tax, Wealth
tax, Service tax, Custom Duty, Excise Duty,
cess and any other statutory dues with the
appropriate authorities and if not, the extent
of the arrears outstanding statutory dues as
at the last day of the financial year
concerned for a period of more than six
months from the date they became payable,
shall be indicated by the auditor
Is the company regular in depositing
undisputed statutory dues including
Provident Fund, Investor Education and
Protection Fund, Employees’ State
Insurance, Income-tax, Sales-tax, Wealth
tax, Service tax, Custom Duty, Excise
Duty, Value Added Tax cess and any
other statutory dues with the appropriate
authorities and if not, the extent of the
arrears outstanding statutory dues as at
the last day of the financial year
concerned for a period of more than six
months from the date they became
payable, shall be indicated by the auditor
KEY AMENDMENTS
CARO 2003
CARO 2015
(x) Cash losses
(viii) Cash losses:- No Change
(xi) Repayment of Dues
(ix) Repayment of Dues:- No Change
(xii) Record Maintenance in case of
advances against shares
Whether adequate documents and
records are maintained in cases where
the company has granted loans and
advances on the basis of security by
way of pledge of shares, debentures
and other securities; If not, the
deficiencies to be pointed out.
---------Deleted---------
(xiii) Provisions to Chit Funds
---------Deleted---------
KEY AMENDMENTS
CARO 2003
(xiv) Records of
shares/debentures/securities
CARO 2015
---------Deleted---------
(xv) Guarantee for Loans
(x) Guarantee for Loans:- No
Change
(xvi) Term Loans
(xi) Term Loans:- No Change
(xvii) Short Term Funds Usage
for Long Term
---------Deleted---------
(xviii) Preferential Allotment of
Shares to Related party
---------Deleted--------.
KEY AMENDMENTS
CARO 2003
CARO 2015
(xix) Security Charge on
Debentures
---------Deleted---------
(xx) Disclosure on Money
raised by Public issue
---------Deleted---------
(xxi) Report on Fraud
(xii) Report on Fraud:- No
Change
?
Please feel free to
QUESTION or CLARIFY
Thank you