1.28 Query
Adverse opinion in auditor’s report.
1.The profit and loss account of a bank for the year ended 31.3.90 shows a net profit of rupees three crores, approximately. However, the notes to accounts disclose that following items have not been provided for:
a) Gratuity Rs. 5.0 crores
b) Arrears of salary Rs. 9.0 crores
The arrears of salary have been disbursed before 31st March, 1990 and the amount has been included in debtors.
2. In view of loss of rupees eleven crores that would arise in case of charge of aforesaid two items to profit and loss account, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
a) Whether it would be proper for the auditors to merely disclose the fact of non-provision of two items and to state that profit and loss account shows a true balance of profit for the period covered by the accounts.
b) Alternatively, whether the auditors shall be required to show the effect of these two items on the ‘Profits’ by stating that-
“the bank has not provided for arrears of salary of Rs. 9.0 crores and incremental gratuity of Rs. 5.0 crores. Had the charge thereof been made to the profit and loss account, it would show a net loss of rupees 11 crores.
Subject to the above, the profit and loss account shows a true balance of profit for the period covered by the accounts”.
Opinion July 10, 1990
1.The Committee notes para 3.7 of the ‘Statement on Qualifications in Auditor’s Report’, issued by the Institute of Chartered Accountants of India, which states as below:
“3.7 In a majority of cases, items which are the subject matter of qualification are not so material as to affect the truth and fairness of the whole of the accounts but merely create uncertainty about a particular item, in such cases, it is possible for the auditors to report that in their opinion but subject to the specific qualifications mentioned, the accounts present a true and fair view. Sometimes, however, the items which are the subject matter of qualification are so material that it would be meaningless to state that, subject to the qualification, the accounts disclose a true and fair view. An extreme example would be where the auditors were not able to examine a substantial part of the books of account, e.g., they were in police custody. In such a case it would not be proper to express an opinion on the truth and fairness of the accounts after merely stating that the books of account were not examined. In such cases, the auditors must report that either –
(i) they are unable to state whether the accounts present a true and fair view; or
(ii) make a categorical statement that in their opinion the accounts do not present a true and fair view.
Which of the above two alternatives should be followed would depend upon the facts of each case. An example of a situation referred to in paragraph 3.7 (ii) is as follows:
(a) The Company has adopted the method of taking entire profits on construction contracts to the Profit and Loss Account on entering into the contract. This has resulted in anticipating the profit in cases where contracts have not even been commenced or where only a very minor part of the expenditure on the contract has been incurred. We are of the opinion that this method of accounting is contrary to accounting principles and methods;
b) In view of para (a) above, we are of the opinion that the said accounts do not give a true and fair view –
(i) In the case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 1980; and
(ii) in the case of the Profit and Loss Account, of the profit of this year ended on that date.”
2. The Committee notes that in the present case if the provision for gratuity and arrears of salary were made, the ‘profit’ shown by the bank in the profit and loss account would get converted into ‘loss’. The Committee is accordingly of the view that it would be meaningless for the auditor to disclose the fact of non-provision of aforesaid items or to qualify the report in respect of the said items since the figure of profit of Rs. 3 crores as per the profit and loss account would be converted into a loss of Rs. 11 crores, if the above provisions were made. The auditor should give an adverse opinion on the balance of the profit as per the profit and loss account, i.e., the auditor should state in his report on the following lines:
“The bank has not charged the arrears of salary paid amounting to Rs. 9.0 crores and instead the payment has been included in the sundry debtors. The bank has not made provision for incremental gratuity amounting to Rs. 5.0 crores. Had the salary paid in respect of arrears been charged to the profit and loss account and had the provision for incremental gratuity been made, the figure profit of Rs. 3.0 crores as shown by the profit and loss account would have converted into a loss of Rs. 11.0 crores. In view of this, the profit and loss account does not show a true balance of profit for the period covered by the accounts.”
3.The opinion of the Committee is as under in respect of issues raised in para 2 of the query:
(a) It will not be proper for the auditor to merely disclose the fact of non-provision of gratuity and arrears of salary and to state that the profit and loss account show a true balance of profit for the period covered by the accounts. The auditor should give an adverse opinion in the manner suggested in para 2 above.
(b) The expressing of a qualified opinion as suggested by the querist in para 2 (b) of the query is not proper in this case. The auditor should give an adverse opinion in the manner suggested in para 2 above.
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