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ICAI reminds members of audit requirements

Nilanjan Dey

KOLKATA, Nov. 3

THE Institute of Chartered Accountants of India (ICAI) has begun a fresh attempt to inform members about how to make qualifications and disclosures in audit reports.

The accountants' body has reminded members that the auditors' report must contain all qualifications, something that is mandated by its `Statement on Qualifications'. The notes to accounts, on the other hand, will normally incorporate explanatory stateme nts given by the directors of the company concerned. The notes, therefore, should not contain the opinion of auditors.

The institute has taken note of the increasing tendency of providing a large number of notes to accounts. Some of these are subject matters of qualifications in the auditors' report, while some others are merely clarificatory in nature.

In this context, ICAI maintains that it is necessary that auditors should reproduce the notes of a qualificatory nature in their report. According to a senior ICAI source, this will enable a reader to understand the significance of the qualifications.

``Our Statement of Qualifications makes it quite apparent that the use of the word `reproduce' does not imply a verbatim reproduction", the source pointed out. A note already furnished in detail by the management may be followed by a crisp self-explanato ry statement. In such situation, a verbatim reproduction of such a note in the audit report may not be necessary.

The statement, ICAI has observed, requires auditors to quantify the effect of their qualifications on financial statements in a concise manner. In situations where this is not possible, an auditor may consider doing this on the basis of estimates worked out by the management.

However, this will necessitate the use of checks and balances. Also, the fact that figures are based on management estimates must be clearly indicated.

The ICAI message is currently being circulated to the accounting profession, courtesy its regional councils and other offices. According to the institute, members must take into account a few issues before they qualify a report.

One, whether a member is in ``active disagreement'' with something that has been perpetrated by the company, or whether he or she is simply unable to form an opinion on items that are not supported by adequate information.

Two, whether the matter concerned is so important (material, in ICAI parlance) as to affect the presentation of a true and fair view of the company's affairs, or whether it affects only a particular detail disclosed in the accounts.

Three, whether the qualification involves a ``material contravention'' of any requirement of the Companies Act, 1956, and which, in turn, has an bearing on the accounts.

As the ICAI source put it, a disclosure, which does not require a qualification, should be mentioned in the auditors' report in a way so that it makes sense to the reader.

The institute, it may be mentioned here, has come out with certain examples of qualifications and disclosures. Consider, for instance, a company that has not made proper disclosures regarding changes in its accounting policy. The auditor, in such circums tances, will be required to state that the company has not disclosed in its accounts the fact (that is, the revision) from this year. Resultantly, key indicators (such as net profit and reserves and surplus) calculated for the period have been affected.