Audit of Financial Statements and Audit Report
What this domain tests
This domain tests audit planning and risk assessment, the audit of specific financial statement items, completion procedures and the form and content of the auditor's report, including the selection of the correct opinion.
Core rules
- Planning involves understanding the entity and its environment, setting materiality, assessing risks and designing the audit strategy and plan.
- Section 143(3) of the Companies Act, 2013 prescribes report content: whether the accounts give a true and fair view, compliance with law, observations on financial transactions and, for specified companies, reporting on internal financial controls under Section 143(3)(i). CARO 2020 applies under the Companies (Audit and Auditors) Rules, 2014.
- Opinions: unmodified; qualified (material but not pervasive); adverse (material and pervasive misstatement); disclaimer (inability to obtain evidence that is material and pervasive).
- Emphasis of Matter and Other Matter paragraphs draw attention to a matter but do not modify the opinion.
- The report must be dated no earlier than the date on which sufficient appropriate evidence has been obtained, and must be signed by the auditor with the membership number.
Worked example
An auditor cannot verify investments of ₹6 crore in a company with total assets of ₹60 crore and profit of ₹2 crore. The matter is material at 10% of assets but is confined to one line, so it is not pervasive. The correct report is a qualified opinion - 'except for the effects of the matter' - with a Basis for Qualified Opinion paragraph describing the limitation. A disclaimer would be wrong because the effect is not pervasive; an adverse opinion would be wrong because the auditor has no evidence that the statements are misstated.
Traps
Using an Emphasis of Matter paragraph to avoid a qualification; confusing adverse with disclaimer; omitting the basis paragraph; dating the report before all confirmations are received.