SA – 700 : Forming an Opinion and Reporting on Financial Statements (Earlier known as ‘The Auditor’s Report on Financial Statements’)

Scope

This SA deals with the auditor’s responsibility to form an opinion on the financial statements and with the form and content of the auditor’s report issued as a result of an audit of financial statements.

It also promotes consistency in the auditor’s report.

Effective date

For audits of financial statements for periods beginning on or after 1-4-2018.

Objectives

• To form an opinion on the Financial Statements (FS) based on an evaluation of conclusion drawn from the audit evidence obtained.
• To express clearly that opinion through a written report.

Requirements

• FS Prepared in all material respects and in accordance with the applicable financial reporting framework.
• To conclude that the Financial Statements are free from material misstatement, whether due to fraud or error after taking into account:
  1. Obtaining sufficient appropriate audit evidence 
     (SA 330)
  2. Whether Uncorrected misstatement are material, individually or in aggregate (SA 450) and
  3. Evaluation as to FS are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework which is based on:—
     • Consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgment.
     • Significant accounting policies are disclosed.
     • Accounting policies are appropriate and consistent with applicable financial reporting framework.
     • Estimates made are reasonable.
     • Information is relevant, reliable, comparable and understandable.
     • Consider overall presentation, structure, contents and whether related notes represent the underlying transactions and events to achieve fair presentation.
  4. Financial statements adequately refer to or describe the applicable financial reporting framework.

Form of Opinion

• Unmodified Opinion: An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for preparation and presentation of the financial statements.
• Modified Opinion :In the following situations auditor’s report may have to be modified :
  1. In respect of the matters that do not affect the auditor’s opinion, the auditor should modify the report by adding a paragraph to highlight a matter.

     For example Corporate Debt Restructuring pending with banks affecting “going concern” or a legal dispute which involves significant uncertainty affecting the financial statements and the same has already been incorporated by management in financial statement. In such matters, the opinion paragraph would refer to the fact that the auditor’s opinion is not qualified in this respect.

  2. In respect of the matters that do affect the auditor’s opinion:-

     A ‘qualified opinion’ should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with the management is not so material and pervasive as to require an adverse opinion, or limitation on scope is not material and pervasive as to require a disclaimer of opinion.

     A ‘disclaimer of opinion’ should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor is unable to obtain sufficient appropriate audit evidence and is hence, unable to express an opinion on the financial statements.

  3. An ‘adverse opinion’ should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is inadequate to disclose the misleading or incomplete nature of the financial statements
• Opinion other than an unqualified opinion:Whenever the auditor requires an opinion other than unqualified, a description of all the substantive reasons should be included in the report and quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the report.
• Limitation on Scope:The SA also requires that in case there is a limitation on scope that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the possible adjustments that might have been necessary, had the limitations not existed.

Auditor’s Report

For Audits conducted in accordance with SA’s Auditor’s Report :

AASB of The Institute of Chartered Accountants’ of India vide its announcement in May 2018 had released an implementation guide specifically addressing reporting standards such as Revised SA 700, SA 705 and SA 706 along with FAQ’s and has given illustrative formats of the Independent Auditor’s Report on standalone Financial Statements under the Companies Act, 2013 and Rules. All the illustrative Audit Reports should be prepared in line with the current applicable Standards of Auditing (SA) only.

Reporting on Internal Financial Controls – Section 143(3)(i) of the Companies Act, 2013 has introduced the requirement of reporting by the auditors on whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls with effect from the financial year beginning 1st April, 2015. As per the “Guidance Note on Audit of Internal Financial Controls over Financial Reporting” issued by the ICAI, the reporting on Internal Financial Controls is only in the context of the audit of the financial statements. Hence, reporting by the auditors will be restricted to adequacy and effectiveness of internal financial controls relating to financial reporting. The Guidance Note covers aspects such as scope of reporting on financial controls under the Companies Act, 2013, essential components of internal controls, technical guidance on audit of internal financial controls and implementation guidance on audit of internal financial controls. Appendices to the Guidance Note include illustrative engagement letter, illustrative management representation letter, illustrative reports on internal financial controls, illustrative risks of material misstatements, related control objectives and control activities. The illustrative formats of the report on internal financial controls also include an illustrative format in case of audit of consolidated financial statements.

Report on Fraud Reporting – Section 143(12) of the Companies Act, 2013 has introduced the requirement of reporting by auditors on frauds. The Auditing & Assurance Board of the ICAI has issued the “Revised Guidance Note on Reporting Fraud under section 143(12) of the Companies Act, 2013.” Section 143(12) and Rule 13 of the Companies (Audit and Auditors) Rule, 2014 have been amended with effect from 14th December, 2015. The amended provisions require reporting by the auditor to the Central Government only for individual frauds of ₹ 1 crore and above. The amended provisions have also made certain changes in the procedure and particulars of reporting under this section. The Revised Guidance Note has been issued to take into account the requirements of these amendments.