1.17 Query: Qualifications in audit report.
1. A public company, having branches in the principal cities of South India, deals in chemicals, glasswares, laboratory equipments etc. The company sells goods to schools, colleges, clinical laboratories, and R & D departments of various companies. As per the querists, the company being a trading company, dealing in low value items, faces stiff competition from other sole proprietors and firms, in getting the business. Therefore, the company has to pay commission for procuring the orders, getting the goods accepted etc.
2. The querists feel that, although all the commission payments are passed by the managing director, there is scope for some of the payments being not genuine. However, it is not possible to clearly identify such payments and quantify them.
3. The querists have mentioned that the Statement on Qualifications in Auditor’s Report, inter alia, states that
(a) It is also necessary that the auditors should quantify, wherever possible, the effect of these qualifications on the financial statements in clear and unambiguous manner if the same is material. In circumstances where it is not possible to quantify the effect of the qualifications accurately, the auditor may do so on the basis of estimates made by the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates. [para 3.10]
However, the querists feel that the management cannot be expected to give an estimate of such amounts in the present instance.
(b) Vague statements the effect of which upon the accounts is not ascertainable should be avoided. [Para 3.15]
4. The querists have sought the opinion of the Expert Advisory Committee as to the manner in which a qualification can be made under the given circumstances, indicating that some payments may not be genuine and the quantum of such payments is not ascertainable.
Opinion October 7, 1992
1. The Committee notes the extracts of paragraphs 3.10 and 3.15 of the Statement on Qualifications in Auditor’s Report, issued by the Institute of Chartered Accountants of India, as stated above, in para 3 of the query.
2. The Committee also notes paragraphs 12, 13 and 14 of the Statement on Standard Auditing Practices (SAP) 4 on ‘Fraud and Error’ which, inter alia, state as follows:
“12. If circumstances indicate the possible existence of fraud or error, the auditor should consider the potential effect of the suspected fraud or error on the financial information. If the auditor believes the suspected fraud or error coud have a material effect on the financial information, he should perform such modified or additional procedures as he determines to be appropriate.
13. Performing modified or additional procedures will normally enable the auditor to confirm or dispel a suspicion of fraud and error. Where the suspicion is confirmed, he should satisfy himself that the effect of fraud is properly reflected in the financial information or the error is corrected.
14. However, the auditor may be unable to obtain audit evidence either to confirm or dispel a suspicion of fraud. In this circumstance, the auditor should consider the possible impact on the financial information and the effect on his report. The auditor will also need to consider relevant laws and regulations and may wish to obtain legal advice before rendering any report on the financial information or before withdrawing from the engagement.”
3. The Committee further notes paragraphs 3.8 and 3.11 of the Statement on Qualifications in Auditor’s Report, which state as follows:
“3.8 Auditors must always bear in mind the well established principle that they must give full information about the subject matter of their qualification and not merely create grounds for suspicion or inquiry and leave it to the shareholders to ascertain the facts by diligent inquiry. The distinction between “information” and “means to information” made in the London and General Bank’s case is still valid.
3.11 The qualifying remarks should be placed in such a manner as to make it very clear as to the particular item of the auditors’ report to which the qualifications relate, e.g., if the qualification is of such a nature that it affects the truth and fairness of the accounts, it should not be placed in such a manner as to give an impression that the auditors have not obtained all the information which has been required in the performance of their work.”
4. On the basis of the above, the Committee is of the opinion, in respect of the query raised by the quietists, that in the circumstances of the case they should try to obtain sufficient evidence with respect to genuineness or other wise of the commission paid by the company, by performing such modified audit procedures as would enable them to either confirm or dispel their suspicion. Such procedures include getting such payments approved by the Board of Directors of the company, which, however, would not absolve them from their liability to perform the other modified audit procedures etc. If even then, the auditors are unable to obtain audit evidence, they should consider the possible impact on the financial information and the effect on their report. The auditors will also need to consider relevant laws and regulations and may also wish to obtain legal advice before submitting any report on the financial information or before withdrawing from the engagement. _______________________________ |