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Query No. 5
Subject:
Audit of circulation figures of publications1
A. Facts of the Case
1. A company was incorporated in the year 1948 under the
Indian Companies Act, 1913, without share capital. It obtained a
license subsequently in 1988 under section 25 of the Companies
Act, 1956. Members of the company comprise the following
categories:
• Publishers
• Advertising agencies
• Advertisers
• News agencies and associations
2. The primary objective of the company, as contained in the
Memorandum of Association of the company, inter alia, states as
follows:
“…to secure accurate circulation figures and data relating to
all periodicals and media that sell advertising space and in
regard to such publications to obtain information as to area of
distribution and fix standard norms and methods for
ascertaining the net sales figures and generally all information
that will be of assistance to advertisers in estimating the value
of any publication for advertising purposes and to record such
information and circulate it to members of this company and
generally to establish a bureau of information in regard to all
publications and the circulation of them for the benefit of
members of this company such service to be known as the
“A.B.C.” service or by such other name or description as the
Council of this company may determine from time to time”.
3. The querist has stated that a manual titled “Guide to ABC
Audit” contains the prescribed company’s audit guidelines which
are required to be followed by all publisher members in order to
avail an ABC certificate of circulation from the company. These
audit guidelines are prescribed/revised by the company’s council
of management from time to time. The company’s council of
management is an elected body comprising:
Publisher representatives .. 8 (Eight)
Advertising agency representatives .. 4 (Four)
Advertiser representatives .. 4 (Four)
4. The querist has further stated that a separate panel of auditors
has been maintained to undertake the company’s audits, namely,
surprise checks and surprise recheck audits. (The querist has also
provided, separately, proforma engagement letters containing terms
of reference of the company’s empanelled auditors in case of
both, surprise checks as well as surprise re-check.) The auditors
from this panel do not undertake any audit at the behest of the
publisher members and are exclusively meant to undertake
assignments given by the company. The querist has further clarified
by a separate letter that in case of a surprise recheck audit by the
company’s auditors, they recheck the circulation figures already
certified by an empanelled firm of Chartered Accountants appointed
by the publisher. The circulation figures as submitted to the
company, duly audited, may undergo a change after a surprise
recheck audit by company’s auditors, if any deductions in circulation
numbers are proposed on account of discrepancies observed.
Circulation figures on recheck may be reduced from the original
‘Net Paid Sales’ earlier certified by the publisher auditors if it is
found that company’s audit guidelines have not been complied
with. The company’s approved auditors also report exhaustively
on the maintenance of books and records, verification of actual
printing at the press and factual information as gathered by them
during their market visit, etc.
5. The querist has also informed that in case of a surprise recheck
audit undertaken by the company’s auditors, they are required to
file with the company, the circulation figures certified by them in
the prescribed format. The circulation figures certified by the
company’s auditors after surprise recheck audit could be the same
circulation figures as were earlier certified by publisher auditors or
revised circulation figures (plus or minus) now certified by the
auditors after a surprise recheck audit. In case, the auditors are
not satisfied with the publisher’s maintenance of books and records,
press and market visit, the auditors also have a choice not to
certify the circulation figures of a member publication. According
to the querist, the prescribed format for recheck audit certificate
conducted by the auditors and the circulation certificate released
by company’s approved auditors retained by a publisher is the same (emphasis supplied by the querist). The prescribed audit
guidelines are applicable both in case of audit carried out by
company’s approved auditors retained by the publisher and surprise
recheck audit conducted by the recheck auditors appointed by the
company.
6. As regards the surprise check by company’s auditors, the
querist has informed that these are carried out by the company on
an ongoing basis for publisher members of the company. Surprise
check report would contain company’s auditors’ factual observations
during their press and market visit as well as their observations on
the publisher’s books and records as factually observed by them.
In surprise check audit, company’s auditors are not required to
certify the circulation figures of a member publication. Company’s
auditors normally report on any inadequacies observed by them in
the publisher’s books and records as well as during their press
and market visit.
7. The querist has also stated that a publisher member of the
company had launched a subscription scheme in a particular market
place. According to the querist, the company’s rule regarding
payment of trade commission on subscription copies is as under:
Trade commission/delivery charges on subscription copies |
: 40% delivery charges calculated on the basis of subscription price in case of dailies. |
|
45% delivery charges calculated
on the subscription price in case
of other than dailies |
The concerned publisher member had launched several subscription
schemes in a particular market place, details of which are as
under:
|
Rs. |
Rs. |
Rs. |
Rs. |
Rs. |
Cover price |
39.00 |
117.00 |
117.00 |
234.00 |
234.00 |
Subscription price |
20.00 |
62.30 |
83.00 |
156.00 |
173.00 |
Discount to subscriber |
19.00 |
54.70 |
34.00 |
78.00 |
61.00 |
Subscription duration (months) |
1 |
3 |
3 |
6 |
6 |
Trade Commission |
8.00 |
24.00 |
33.20 |
62.40 |
62.40 |
% of subscription price |
40% |
38% |
40% |
40% |
36% |
The above details were checked and taken from the publisher’s
books and records by the empanelled auditors.
8. The querist has further stated that on a market visit by the
empanelled auditors and their interaction with the hawkers/sub
agents, the auditors observed that it was the practice of the trade
that copies delivered to households in a particular city received a
flat rate of 30% on the cover price as trade commission to deliver
both the line copies as well as subscription copies. This observation
was established through three separate market visits by three
separate firms of empanelled auditors. However, the concerned
publisher insisted in writing that the trade commission as per the
above table was paid to the trade, as also recorded in the books
and records. The publisher had entered into individual arrangements
with the traders for payment of trade commission at the prescribed
rates as mentioned in the books and records.
9. According to the querist, in the instant case, if the trade
commission is calculated at the rate of 30% of the cover price for
the above subscription copies, then the trade commission exceeds
40% on the subscription price. Normally, the publisher always
discounts the subscription price for a particular period as the
subscription payment is received in advance by the publisher.
B. Query
10. Under the circumstances, the querist has sought the opinion
of the Expert Advisory Committee on the following issues:
(i) What should be the stand, the company and its
empanelled firms of Chartered Accountants take when
on a scrutiny of publisher’s books and records, the trade
commission is found to be in compliance with the existing
rules of the company in this regard, however, on a market
visit by the company’s auditors and during their interaction
with the sub-agents/hawkers, auditors ascertain albeit
orally that the trade margins received by the sub-agents/
hawkers were in excess of the prescribed trade margins
by the company.
(ii) Under the circumstances as explained above, whether:
(a) the company and its empanelled auditors should
rely only on the publisher’s books and records
produced before them thereby disregarding the
evidence/observations from the market place
gathered by them.
(b) considering the oral market evidence gathered by
the company auditors and taking the same into
account, the company and the company’s auditors
may not entirely rely on the publisher’s books and
records and consequently not certify the publisher’s
circulation figures pertaining to subscription copies.
[It may be noted that no written evidence from subagents/
hawkers is possible to be obtained in the
early morning hours and the auditors have
necessarily to rely only on their observations and
interactions with the sub-agents/hawkers.]
(c) if the company as well as its empanelled auditors
rely on their observations and interactions with the
sub-agents/hawkers during their market visit and
consequently, conclude not to certify the publisher’s
circulation figures, such a conclusion would be within
the Auditing and Assurance Standards issued by
the Institute of Chartered Accountants of India and
also stand the test of legal scrutiny, if any.
C. Points considered by the Committee
11. The Committee notes that even though the querist has not
specifically raised questions in respect of surprise check and
surprise recheck, it appears from the Facts of the Case that the
query basically relates to two kinds of assignments: (a) surprise
check and (b) surprise recheck, which are entirely different in
respect of their nature, purpose, manner of reporting, and scope
of work to be performed, etc. Accordingly, the Committee has
hereinafter dealt with these two kinds of assignments, separately,
to express its opinion on the issues raised in paragraph 10 above.
(a) Surprise check
12. The Committee notes from paragraph 6 above that in case of
surprise check, the company’s empanelled auditors are required
to provide a detailed surprise check report containing the factual
observations during their press and market visit as well as their
comments on the publishers’ books and records as factually
observed by them. In other words, the auditor does not certify the
circulation figures but only reports his findings by performing the
agreed-upon procedures as per the terms of reference. In this
regard, the Committee notes paragraphs 2 and 4 of Auditing and
Assurance Standard (AAS) 32, ‘Engagements to Perform Agreedupon
Procedures Regarding Financial Information’2, issued by the
Institute of Chartered Accountants of India, which state as follows:
“2. In an engagement to perform agreed-upon procedures,
the auditor is engaged by the client to issue a report of factual
findings, based on specified procedures performed on specified
subject matter of specified elements, accounts or items of a
financial statement. For example, an engagement to perform
agreed-upon procedures may require the auditor to perform
certain procedures concerning individual items of financial data,
say, accounts payable, accounts receivable, purchases from
related parties and sales and profits of a segment of an entity,
or a financial statement, say, a balance sheet or even a
complete set of financial statements.”
“4. The objective of an agreed-upon procedures
engagement is for the auditor to carry out procedures of
an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report
on factual findings.”
On the basis of the above, the Committee is of the view that the
surprise check audit in the present case is of the nature of agreedupon
procedures engagement since here, the auditor is to just
report his factual findings on the basis of his observations during
the press visit and market visit; and his comments on the
maintenance of publisher’s books and records as factually observed
by him.
13. As far as the scope and objective of such an engagement,
the procedure to be followed and evidence gathered during the
assignment are concerned, the Committee notes paragraphs 5, 8,
14, 15 and 16 of AAS 32 which are reproduced below:
“5. As the auditor simply provides a report of the factual
findings of agreed-upon procedures, no assurance is
expressed by him in his report. Instead, users of the report
assess for themselves the procedures and the findings reported
by the auditor and draw their own conclusions from the work
done by the auditor.”
“8. The auditor should conduct an agreed-upon
procedure engagement in accordance with this AAS and
the terms of the engagement.”
“14. The auditor should document matters which are
important in providing evidence to support the report of
factual findings, and evidence that the engagement was
carried out in accordance with this AAS and the terms of
the engagement.
15. The auditor should carry out the procedures agreedupon
and use the evidence obtained as the basis for the
report of factual findings.
16. The procedures applied in an engagement to perform
agreed-upon procedures may include:
- Inquiry and analysis.
- Recomputation, comparison and other clerical accuracy
checks.
- Observation.
- Inspection.
- Obtaining confirmations.
…”
From the above, the Committee is of the view that in such kinds of
engagements, the auditor should carry out only those procedures
as have been agreed upon. The Committee also notes from the
letter of engagement in case of surprise check that the terms of
reference require the auditor to ascertain the genuineness of
circulation of a publication through verification of distribution of
copies by visiting distribution centers both in the town of publication
as well as outside publishing centers and also to verify actual
commission being paid in the market place, i.e., to conduct market
visit and check whether the same corroborates with publisher’s
records. Thus, the auditor in case of surprise check, should carry
out the above-mentioned and other procedures as detailed out in
the letter of his engagement and report on the factual findings
observed by him. As far as reporting is concerned, the Committee
notes paragraph 17 of AAS 32, which states as follows:
“17. The report on an agreed-upon procedures
engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient
detail to enable the reader to understand the nature and
the extent of the work performed. The report should also
clearly mention that no audit or review has been
performed.”
14. On the basis of the above, the Committee is of the view that
in case of surprise checks, the auditor should report on his factual
findings/observations based on the evidences obtained during his
audit after carrying out the audit in accordance with the terms of
his engagement and various requirements of AAS 32. During his
audit, he should document all his observations and findings which
are important in providing evidence to support his report of factual
findings as required by above-reproduced paragraph 14 of AAS
32.
(b) Surprise re-checks
15. The Committee notes from paragraphs 4 and 5 above that in
case of surprise recheck, the empanelled company’s auditors are
required to certify the publication figures. In this regard, the
Committee notes paragraph 2, ‘Scope of Special Purpose Audit
Reports and Certificates’ of Guidance Note on Audit Reports and
Certificates for Special Purposes, issued by the Institute of
Chartered Accountants of India, which, inter alia, states as below:
“2.1 Audit reports or certificates for special purposes may be
issued in connection with:
…
(e) Compilation of statistics or ascertainment of basic figures
e.g., for the purpose of fixing quotas or levies.”
From the above, the Committee is of the view that in case of
surprise re-check, the auditor is issuing certificate for special
purpose (the terms ‘auditor’ and ‘audit’ are used in a generic
sense hereinafter to deal with the certification assignment) since
as per the terms of letter of engagement of the auditor in case of
surprise-rechecks, the auditor is required to certify the circulation
figures submitted by the publisher with the company. The
Committee is also of the view that in case of such audits, since the
auditor is required to certify certain items of financial statements
and is not required to review the financial statements as a whole,
the scope of audit in such kind of assignment would be more
intensive and specific as compared to general purpose audit. The
Committee is further of the view that in such cases, even though
the scope, objective and content of certificate is determined by the
terms of engagement of auditor, the audit principles, procedures,
methods and techniques of audit as prescribed by Auditing and
Assurance Standards, issued by the Institute of Chartered
Accountants of India would still be applicable, to the extent relevant.
16. The Committee notes from the proforma engagement letter in
case of surprise re-check that the auditors are required to make a
surprise visit to the market place, ascertain the trade terms at
which copies are sold at various centers within the city and also
report in detail on various points, including whether any amount
has been paid to the agents / sub-agents over and above the
normal trade commission. In the view of the Committee, to report
on such matters, the auditors should obtain sufficient appropriate
evidence to base their conclusions. In this context, the Committee
notes paragraph 15 of Auditing and Assurance Standard (AAS) 1,
‘Basic Principles Governing an Audit’3, issued by the Institute of
Chartered Accountants of India, which 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.”
17. The Committee further notes that Auditing and Assurance
Standard (AAS) 5, ‘Audit Evidence’4, issued by the Institute of
Chartered Accountants of India, explains ‘Sufficient Appropriate
Audit Evidence’ in paragraphs 2 and 3, inter alia, as follows:
“2. Sufficiency and appropriateness are interrelated and
apply to evidence obtained from both compliance and
substantive procedures. Sufficiency refers to the quantum of
audit evidence obtained; appropriateness relates to its
relevance and reliability.
3. The auditor should evaluate whether he has obtained
sufficient appropriate audit evidence before he draws his
conclusions therefrom. The audit evidence should, in total,
enable the auditor to form an opinion on the financial
information.”
18. The Committee also notes paragraphs 7 to 10 of AAS 5,
which provide as follows:
“7. The reliability of audit evidence depends on its source
internal or external, and on its nature visual, documentary or
oral. While the reliability of audit evidence is dependent on
the circumstances under which it is obtained, the following
generalisations may be useful in assessing the reliability of
audit evidence:
- External evidence (e.g. confirmation received from a third
party) is usually more reliable than internal evidence.
- Internal evidence is more reliable when related internal
control is satisfactory.
- Evidence in the form of documents and written
representations is usually more reliable than oral
representations.
- Evidence obtained by the auditor himself is more reliable
than that obtained through the entity.
8. The auditor may gain increased assurance when audit
evidence obtained from different sources or of different nature
is consistent. In these circumstances, he may obtain a
cumulative degree of assurance higher than that which he
attaches to the individual items of evidence by themselves.
Conversely, when audit evidence obtained from one source is
inconsistent with that obtained from another, further procedures
may have to be performed to resolve the inconsistency.
9. The auditor should be thorough in his efforts to obtain
evidence and be objective in its evaluation.
10. When the auditor is in reasonable doubt as to any
assertion of material significance, he would attempt to obtain
sufficient appropriate evidence to remove such doubt. If he is
unable to obtain sufficient appropriate evidence he should not
express an unqualified opinion.”
19. From the above, the Committee is of the view that in the
present case, since the internal evidence in the form of records,
documents and representations by the management is inconsistent
with external oral representations by sub-agents/hawkers and
observations of the auditors, the auditors should consider
performing additional appropriate audit procedures, on the basis
of their past experience, knowledge and nature of the business
carried on by the enterprise so as to obtain corroborative sufficient
appropriate audit evidence for the purpose of certifying the
circulation figures. For example, the auditor should try to obtain
written confirmations from the sub-agents/hawkers regarding the
trade terms. In case they are unable to reach any conclusion, the
auditors should exercise their own judgement and skills on the
basis of degree and extent of reliability of available audit evidence
so as to certify the circulation figures and should make appropriate
and adequate disclosures considering the various points to be
covered as prescribed in the engagement letter of the auditors,
the audit guidelines for the company’s auditors as contained in the
manual ‘Guide to ABC Audit’ and various notifications issued by
the company from time to time on audit procedures for the auditors.
The auditor may also decide not to certify the circulation figures in
case he is not satisfied with the publisher’s maintenance of books
and records, and on the basis of his findings from the press and
market visit.
D. Opinion
20. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 10 above:
(i) In case of surprise check, the auditor should report on
the factual findings observed by him during his audit
after carrying out the audit in accordance with the terms
of his engagement and various requirements of AAS 32
as discussed in paragraph 14 above. In case of surprise
re-checks, the company’s empanelled auditor should
exercise his judgement and skills to base the certificate
of circulation figure, considering the degree of reliability
of audit evidences obtained. He may also consider
performing certain additional procedures to obtain
corroborative sufficient appropriate audit evidences in
respect of inconsistencies observed between the
evidences obtained as stated in paragraph 19 above. In
case, he is unable to reach any conclusion, he may
decide not to issue the certificate for circulation figure
of the publication. The company may have to take stand
based on the information as aforesaid applying its own
judgement in the facts and circumstances of the case.
The company may also consider obtaining additional
corroborative evidences by calling for separate
investigation, as per its terms of assignment with the
publisher.
(ii)(a) In the case of surprise checks, the question of reliance
upon the publisher’s books and records does not arise
as the auditor only has to report on his factual findings/
observations during his assignment. In case of surprise
re-check, the evidences obtained/observations from the
market place should not be disregarded, rather, these
should be corroborated with the other evidences by
performing additional procedures, e.g., obtaining written
confirmations from hawkers/sub-agents, as discussed
in paragraph 19 above and if that is not possible, the
matter should be adequately disclosed in the certificate
issued for surprise re-check. As far as reliance by the
company is concerned, the company may have to take
stand based on the information as aforesaid applying
its own judgement in the facts and circumstances of the
case. The company may also require separate
investigation to obtain additional corroborative evidences,
as discussed in (i) above.
(b) The questions of reliance on publisher’s books and
issuance of certificate do not arise in case of surprise
check, as discussed in (i) and (ii)(a) above. In case of
surprise re-check, if it is not possible to obtain written
evidence, the oral evidence may be relied upon after
judging its reliability in the facts and circumstances of
the case, as recognised in AAS 5 also. Accordingly, the
auditors should not issue a clean certificate with respect
to the circulation figures if they are convinced about the
reliability of the observations/evidence gathered from
the market place. The company’s reliance would depend
upon the certificate provided by the auditors.
(c) The question of certifying does not arise in case of
surprise check as the auditor has only to report on his
factual findings/observations during his assignment as
discussed in (i), (ii)(a) and (ii)(b) above. In case of
surprise re-check, if the auditors rely on their
observations and interactions with the sub-agents/
hawkers in the facts and circumstances of the case, not
certifying the publisher’s circulation figures in the
circumstances would be within the Auditing and
Assurance Standards. Regarding the legal stand on such
practice, the Committee does not express any opinion
since as per Rule 2 of the Advisory Service Rules of the
Expert Advisory Committee, the Committee does not
answer queries involving legal interpretation of various
enactments.
1 Opinion finalised by the Committee on 14.5.2007.
2 Auditing and Assurance Standard (AAS) 32 has since been renamed,
renumbered and categorised as Standard on Related Services (SRS) 4400,
‘Engagements to Perform Agreed-upon Procedures Regarding Financial
Information’.
3 Auditing and Assurance Standard (AAS) 1 has since been renamed, renumbered
and categorised as Standard on Auditing (SA) 200, ‘Basic Principles Governing
an Audit’.
4 Auditing and Assurance Standard (AAS) 5 has since been renamed, renumbered
and categorised as Standard on Auditing (SA) 500, ‘Audit Evidence’ which has
subsequently been revised. The Revised Standard is effective for audit of
financial statements for periods begining on or after April 1, 2009.
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