Query No. 44

Subject:          

  Report by the auditor where the auditor concludes that the

evidence is not sufficient appropriate audit evidence.1

A. Facts of the Case

1. A  government  company  is  engaged  in  production  of  fertilisers. Besides fertilisers,  the company also manufactures  various nitrogenous chemicals. The company has four manufacturing units of which, at present, only  one  is  operational.  The  company  also  has  six  marketing  centres. Besides  the  company’s  own  products,  the  company  is  also  engaged  in selling fertilisers and other ancillary products on consignment sale basis/ outright purchase basis.

2. As  per  the  querist,  the  statutory  auditors,  in  their  report  to shareholders, have reported that, in the absence of details, they are unable to comment on the “liability, if any, arising from non/short deductions/ delay  in  deduction  and  deposit  of  tax  deducted  at  source  on  various requisite payments and from refund of income tax deducted at source to employees and other statutory liabilities for the year and earlier years”.

3. According to the querist, the company has provided all the details and necessary records required by the auditors during the course of audit. No case of the nature as pointed out in the audit report has been brought to the notice of the management by the statutory auditors. The management has  also  not  come  across  any  such  instance.  As  per  the  querist,  the observation, as mentioned above, is not only vague but also uncalled for, as upto date tax audit reports of the company, wherever called for, were made available to the auditors for verification.

B. Queries

4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

        (a)        Whether the observation of the statutory auditors is in order; and

        (b)        if so, what steps the company is required to take to get rid of the observations made by the auditors.

C. Points considered by the Committee

5. The Committee notes that paragraph 15 of the Statement on Standard Auditing Practices (SAP) 1, ‘Basic Principles Governing an Audit’, issued by the Institute of Chartered Accountants of India, provides as follows:

“15.  The auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information.”

6. The Committee further notes that the Statement on Standard Auditing Practices (SAP) 5, ‘Audit Evidence’, explains the expression ‘sufficient appropriate  audit  evidence’.  Paragraph  2  of  the  Statement  states  that “sufficiency  refers  to  the  quantum  of  audit  evidence  obtained; appropriateness relates to its relevance and reliability”.

7. The  Committee  also  notes  that  section  227(3)  of  the  Companies Act, 1956, provides as follows:

“The auditors’ report shall also state –

(a)Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit;

.........”

8. The  Committee  further  notes  clause  (8)  of  Part  I  of  the  Second Schedule to the Chartered Accountants Act, 1949, which provides, inter- alia, that a chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he “fails to obtain sufficient information to warrant the expression of an opinion”.

9. The Committee is of the view that in case an auditor concludes, on the basis of the evidence made available to him, that the evidence is not sufficient appropriate audit evidence, he should not express an opinion. In  the  case  under  consideration,  the  auditor  is  obliged  to  express  his inability to comment on the matters stated in paragraph 2 of the facts of the case, in case he is not satisfied about the details and records made available  to  him.  In  such  a  situation,  it  would  be  appropriate  for  the management  to  enquire  from the  auditor  the  weaknesses  in  the  details and records and ascertain from him as to how sufficient appropriate audit evidence  can  be  provided  to  his  satisfaction  and  thereafter  to  act accordingly, so that the auditor does not give such observations.

D. Opinion

10. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 4:

        (a)        If the auditor is not satisfied that the evidence made available to him is sufficient appropriate audit evidence, he is justified in                     making such observation.

        (b)        The management should ascertain from the auditor as to how sufficient  appropriate  audit  evidence  can  be  provided  to                      his satisfaction and, thereafter, to act accordingly, so that the auditor does not give such observations.

 1Opinion finalised by the Committee on 18.12.2001.