SA 700 and CARO 2015

Presented by: Khushroo B. Panthaky Senior Partner

Walker Chandiok & Co LLPChartered 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 OpinionWhen 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 circumstancesWhen 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; andb) 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/CommentsModification to auditor opinion / emphasis of

matter

Qualified or Adverse or Disclaimer of opinion

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.

REPORTING U/S 143(3)(H) OF COMPANIES ACT,2013

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 CARO 2015(i) Fixed Assets (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.

---------No Change--------

---------No Change--------

---------Deleted---------

(ii) Inventory (ii) Inventory - No change

CARO 2015CARO 2003

(iii) Loans covered u/s 301 of Co’s Act,1956 (iii) Loans u/s 189 of Co’s Act, 2013

(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.

Deleted : The requirement on disclosure of number of parties and amount of loans granted (secured or unsecured to companies, firms or other parties covered in the register maintained under section 189 of the Companies Act,2013)

(b) Whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured are prima facie prejudicial to the interest of the company.

(e) Has the company taken any loans, secured or unsecured from 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.

KEY AMENDMENTS

CARO 2003 CARO 2015

(iv) Internal Control System (iv) Internal Control System- No Change

(v) Loans covered u/s 301 of Co’s Act,1956

---------Deleted---------

KEY AMENDMENTS

(iii) Loans covered u/s 301 of Co’s Act,1956

(iii) Loans u/s 189 of Co’s Act, 2013

(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.

---------Deleted---------

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 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;

---------Deleted---------

(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 CARO 2015

(xiv) Records of shares/debentures/securities

---------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

KEY AMENDMENTS

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Please feel free to QUESTION or CLARIFY

Thank you