1.30     Query

Auditors’ responsibility on matters contained in Directors’ report

The querist has sought the opinion of the Expert Advisory Committee on the following issues arising during the conduct of the audit of a warehousing corporation:

(i) In case, a wrong material statement relating to financial analysis is included in the Board of Directors’ report for the preceding period, is the auditor required to mention this fact in his report of the subsequent year?

(ii)In case the report of auditors is qualified in certain respects and on others he has not expressed an opinion, is it obligatory on the Board of Directors to comment on these issues in their report? If no comments are offered, will it mean that the qualifications have been accepted by the directors and no further qualification is necessary, in the report of the auditors conducting subsequent years audit?

                                                                Opinion                                                        October 15,1986

            1.  The Committee notes that Section 31 (4) and (5) of the Warehousing Corporation Act 1962, requires as below:

“4. The Auditor shall be supplied with a copy of the annual balance sheet and the profit and loss account of the Warehousing Corporation and it shall be his duty to examine them together with the accounts and vouchers relating thereto, and he shall have a list delivered to him of all books kept by the Corporation and shall at all reasonable times have access to the books, accounts and other documents of the Corporation and may require any officer of the Corporation such information and explanation as the auditor may think necessary for the performance of his duties as auditor.

5. The auditor shall make a report to the shareholders on the accounts examined by him and on the annual balance sheet and profit and loss account and in every such report he shall state whether in his opinion the accounts give a true and fair view-

(a)   in the case of the balance sheet, of the state of the Corporation’s affairs at the end of its financial year, and

(b) in the case of the profit and loss account, of the profit or loss for its financial year, and in case he has called for any explanation or information from the officers, whether it has been given and whether it is satisfactory.”

2.On the basis of the above, the Committee is of the opinion that since the auditor is required to report only on the balance sheet and profit and loss account for the year, the auditor need not mention a material misstatement contained in the Director’s Report pertaining to the previous period. However, with regard to a material mis-statement contained in the Directors’ Report relevant to the accounts of the period under audit, the auditor may follow the recommendations contained in International Auditing Guideline No. 14, “Other Information in Documents Containing Audited Financial Statements” issued by the International Auditing Practices Committee of the International Federation of Accountants.

3.With regard to the issue raised by the querist in para 1 (ii), the Committee notes that directors of the Corporation are not under any statutory obligation to comment on the qualifications in the auditors’ report as per the Warehousing Corporations Act, 1962, Central Warehousing Corporation Rules 1963 and Central Warehousing Corporation (General) Regulations, 1965.

4.On the basis of above, the Committee is of the opinion that the directors of the company are not required to comment in their report on the qualifications contained in the auditors’ report.

5. The Committee further notes that para 3.16 of the Statement on Qualifications in Auditors’ Report, states as below:

“3.16. It is also not a good practice to qualify by reference to a report made in an earlier year because all shareholders may not have access to such reports. The following type of statement should be avoided:

 ‘The position of advance to ABC amounting to Rs………. remains the same as explained in our last report.’

 Each year’s accounts being independent, the essential facts relating to a qualification made in an earlier year must be repeated where appropriate.”

6.On the basis of the above, the Committee is of the opinion that in case the matters on which the auditor had qualified his report of the previous year remain unchanged in the accounts of the current year, the auditor should qualify his report as recommended in the above paragraph. In other words, if the corporation has made necessary modifications in the current year’s accounts to the satisfaction of the auditor in respect of the matters under qualification in the previous years’ accounts, the auditor should not qualify his report pertaining to current year’s accounts, on those matters. Thus, whether an auditor should qualify his report is independent of the fact whether or not the directors had commented in their report on qualifications in auditor’s report of the previous year.

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