Chapter 15 Forming an Opinion & Reporting – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Forming an Opinion & Reporting – Secretarial Audit, Compliance Management and Due Diligence Study Material
Question 1.
Is there a need to obtain a Management representation letter from the Auditee Company ? Describe. (Dec 2019, 5 marks)
Answer:
A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.
The auditor may obtain a management representation letter from the auditee company. The letter may be signed by Managing Director/Company Secretary/Senior Management who would normally have authority to issue the same. The Auditor can use this letter of representation as part of his audit evidence.
However, it is advised to exercise all possible care, reasonable skill & due diligence. Adequate enquiries should be made in respect of matters which are capable of direct verification. Mere getting certification from management may defeat the purpose of the audit.
Question 2.
What do you mean by an unqualified/unmodified opinion by an auditor ? (Dec 2019, 3 marks)
Answer:
An unqualified opinion is also known as a clean opinion. The auditor reports an unqualified opinion if the affairs of the company are presumed to be free from material misstatements. In addition, an unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance and the auditor has performed fieldwork to test its effectiveness.
An unqualified opinion contains no reservations concerning the company. This is also known as a “clean” opinion meaning that the affairs of the company are presented fairly.
The Auditor should express an unmodified opinion when based on Audit Evidence, the Auditor concludes that: ‘
(a) there is due compliance with the applicable law in terms of timelines and process;
(b) the records as relevant for the audit verified by him as a whole are free from misstatement and maintained in accordance with applicable laws; and
(c) the auditor should express an unmodified opinion when the auditor concludes that the information on the affairs of the company in all material respects, are in accordance with the applicable reporting framework.
Question 3.
Highlight inclusion of Emphasis of Matter (EOM) in an audit report. (Dec 2020, 3 marks)
Answer:
Emphasis of matter (EOM) is included in the audit report to seek the attention of the reader, to make the reader aware about the specific instances which are not in the general course of business. Such matters can have the positive as well as negative impact on the affairs of the company in future. The purpose of an EOM paragraph is to draw the users’ attention to a matter already disclosed but the auditor believes that, it is fundamental to their understanding and should be a part of the report.
The following are examples of the matters which should be considered as emphasis of matter:
- an uncertainty relating to the future outcome of exceptional litigation or regulatory action;
- when there is uncertainty about exceptional future events, pending litigations
- early adoption of new accounting standards
- adoption of new technology
- recent changes in the regulatory environment
- when a major catastrophe has had a major effect on the financial position.
- early application (where permitted) of a new accounting standard (for example, a new International Financial Reporting Standard) that has a pervasive effect on the financial statements in advance of its effective date; and
- a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.
Question 4.
“After the exit meeting and the completion of the audit procedures, the auditor should prepare an executive summary of audit finding”. Comment and list out points which should form part of executive summary. (Aug 2021, 5 marks)
Answer:
After the exit meeting and the completion of the audit procedures, the auditor should prepare an Executive summary of audit findings. The summary explains the key audit issues, the category of risk, their resolution, agreed adjustments. After discussing the executive summary the audit certificate should be signed by the auditor and by the management or person authorized by the management of the company.
The executive summary is a high-level summary, which explains audit findings, while it is a concise document; it should contain sufficient information to stand alone as a summary of the evidence which supports audit team’s conclusion on the appropriate form of audit certificate.
The executive summary should include:
- a summary of the auditee’s operations and purpose;
- a summary of the regularly framework within which the auditee operates;
- an explanation of the audit approach and the balance between test of controls and substantive procedures;
- a summary of the key risk identified;
- a commentary on key balances;
- a commentary on the accounting policies and significant account areas;
- a summary of the result of audit procedures;
- details of areas where difficult questions of principle or judgement were involved;
- matters brought forward from previous year audit;
- a summary of other important matters for attention;
- outstanding matters, for example, outstanding reappointment orders or letter authorizing agreed amendments to the financial statement;
- a summary of matters carried forward to the next years audit; and (xiii) a conclusion on the appropriate form of audit certificate.
The report should clearly mention the process name; significant findings with respect to the criteria, analysis of the consequences of the findings; and recommendations of the auditor. Each observation should be supported by a set of facts and each recommendation to the management should be supported by a business reasons for implementation.
Further, the replies on the auditor’s observations and recommendation/comments of the management of the Auditee’s company should be obtained and should be recorded in the audit file. Also, in case where the auditor opinion is other than the unmodified opinion, the full rationale should be given in the executive summary.
Question 5.
Under what circumstances, the auditor should express modified opinion? Explain. (June 2022, 5 marks)
Question 6.
2022 – June [6A] (Or) (i) Elucidate the term ‘Emphasis of matter’ giving suitable examples. (june 2022, 5 marks)
Question 7.
Write a short note on Pre requisite for the Reporting.
Answer:
An Audit Report should:
- Accurate: Free from errors and distortions and faithful to the underlying facts.
- Objective: Fair, impartial, and unbiased and is a result of a fair minded and balanced assessment of all relevant facts and circumstances.
- Clear: Easily understood and logical, avoiding unnecessary technical language and providing all significant and relevant information.
- Concise: To the point, avoid unnecessary elaboration, superfluous detail, redundancy, repetitiveness and wordiness.
- Constructive: Helpful to the engagement client and the organization and leads to improvements where needed.
- Complete: Lacking nothing that is essential to the target audience and includes all significant and relevant information and observations to support recommendations and conclusions.
- Timely: Opportune and expedient, depending on the significance of the issue, allowing management to take appropriate corrective action.
Question 8.
Explain the different stages of communication and discussion.
Answer:
Different stages of communication and discussion should be as under:
- Preliminary Draft: At the conclusion of fieldwork, the auditor should draft the report and present it to the entity’s management for auditee’s comments.
- Exit Meeting: The auditor should discuss with the management the findings, observations, recommendations, and text of draft and obtain their comment on the draft, achieve consensus and reach an agreement on the audit findings.
- Formal Draft: The auditor should prepare a formal draft, in view of the outcome of the exit meeting and other discussions. Upon review of such changes by the auditor and the management, the final report should be issued.
- Final Report: The report should be submitted to the appointing authority or such members of management, as directed.
Question 9.
Audit evidence plays a significant role in forming of Opinion. Comments
Answer:
The Audit evidence plays a significant role in forming of Opinion. Based on such evidence the auditors form his opinion in the report, accordingly the auditor should obtain competent, relevant and reasonable evidence to support his judgement and conclusions.
The competent evidence is information which is quantitatively sufficient and appropriate to achieve the auditing results and is qualitatively impartial to inspire confidence and reliability.
The Reliable audit evidence is evidence that is impartial, the reliability of audit evidence is dependent upon its nature, its source and the method used to obtain it. While collecting the audit evidence the auditor should consider that
- Documentary evidence is more reliable than oral evidence
- Evidence of which the auditor has direct personal knowledge is the most reliable evidence
- Independent evidence obtained for external sources is more reliable than internal evidence, if that evidence is truly Independent and complete.
- Visual evidence is highly reliable for conforming the existence of assets, but not their ownership value.
- Drawing conclusions solely through examining relationship between figures in the account (Analytics Review) is less reliable evidence
- Oral evidence must be considered as the least reliable, whenever feasible auditor should attempt to obtain documentary confirmation of oral evidence.
- The reliability of information generated within the auditee entity is a function of the reliability of internal control systems within the entity.
- Photocopies are less reliable than the originals, the source of photocopies should be identified by noting the source as far as possible the photocopies should be certified.
- Evidence, which is accepted by the auditee entity, is always reliable
- The auditor may gain increased assurance when audit evidence obtained from different source is consistent.
Question 10.
Auditor’s Report should include a section with the heading “Auditor’s Responsibility”. Explain
Answer:
The Auditor’s Report’ should include a section with the heading “Auditor’s Responsibility”. Auditor’s Report shall state that the responsibility of the Auditor is to express the opinion on the compliance with the applicable laws
and maintenance of records based on audit. The Auditor’s Report shall also state that the audit was conducted in accordance with applicable Standard, if any. The Auditor’s Report shall also explain that those Standards require that the Auditor should comply with statutory and regulatory requirements and plan and perform the audit to obtain reasonable assurance about compliance with applicable laws and maintenance of records.
Auditor’s Report should state that due to the inherent limitations of an audit including internal, financial and operating controls, there is an unavoidable risk that some material misstatements or material non compliances may not be detected, even though the audit is properly planned and performed in accordance with the Standards.
Forming an Opinion & Reporting Notes
Unqualified / Unmodified Opinion:
An unqualified opinion is also known as a clean opinion. The auditor reports an unqualified opinion if the affairs of the company are presumed to be free from material misstatements. In addition, ah unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance, and the auditor has performed fieldwork to test its effectiveness.
An unqualified opinion contains no reservations concerning the company. This is also known as a “clean” opinion, meaning that the affairs of the company are presented fairly.
Emphasis of matter (EOM):
Emphasis of matter (EOM) is included in the audit report to seek the attention of the reader, to make the reader aware about the specific instances which are not in the general course of business. Such matters can have the positive as well as negative impact on the affairs of the company in future. The purpose of an EOM paragraph is to draw the users’ attention to a matter already disclosed but the auditor believes that, it is fundamental to their understanding and should be a part of the report.
Materiality:
Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy in the records of the company. The objective of an audit of financial statements is to enable the auditor to express an opinion Whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP).
Adverse Opinion:
An adverse opinion is an indicator of fraud, and public entities that receive an adverse opinion are forced to take corrective measures.
Qualified Opinion:
An Opinion can be considered as a qualified opinion when the auditor specifically provides the additional paragraph or points out the specific instances where the company has failed to do compliance as required under the law, or provides reasons for the not issuing the unqualified report on the affairs of the company.