1.20 Query
Audit in a situation where the opening balances are not available.
1. The last audit of a public limited company and its wholly owned subsidiary was completed by a firm of chartered accountants for the year ended 31st March, 1977. The company had also prepared accounts for the year 1977-78 and the provisional unaudited balance sheet of the company was ready by 20th March, 1980. On 29th March, 1980, the Managing Director of the company- a key person-met with a near fatal accident and was confined to bed up to December, 1985. During this period, the company was raided three times by the income tax authorities, twice by the excise authorities, and twice by sales tax authorities. In these raids several documents including several vouchers and account books were seized by these authorities. The remaining papers with the company were lost, stolen, or misplaced, during the period when the company premises were in the possession of the High Court Receiver on and from 11th April, 1984. Further, Income-tax authorities have misplaced 480 pages of the company ledger for the year 1977-78 which was seized by them. The matter is still pending in the appeal. On and from 19th December, 1980 the date on which the Income-tax authorities took away the unaudited books -no books have been maintained by the company till 31st March, 1986. Since no books of account were maintained by the company during the abovesaid period, according to the querist, question of audit did not arise.
2. According to the querist, in the absence of various supporting papers, which are almost impossible to obtain, it is not possible to prepare final accounts which represent true and fair view of the state of affairs of the company for the years 1977-78 onwards. The company has started maintaining accounts w.e.f. 1st April, 1986, but since opening balances were not available, accounts could not be finalised and audited. The Managing Director of the company has now desired to complete the accounts on the basis of the opening balances as on 1st April, 1986, duly certified by him, based on the facts available to him from various sources, and get them audited by appointing the querist’s firm as auditors.
3.The querist has further stated that the company has filed income-tax returns on the basis of whatever data was available with them for all these years but has not complied with relevant provisions of the Companies Act, 1956, in the matter of conducting Annual General Meetings and filing the relevant documents with the Registrar of Companies, preparation and filing of Annual Return, for which the company and its directors have been prosecuted and have paid the prescribed fines.
4. The querist has sought the opinion of the Expert Advisory Committee, keeping in view his assessment that the records seized by the authorities will not be released for some years to come and even if released will not be sufficient to prepare the accounts which give a true and fair view, in the following issues:
(i) Whether it is advisable to audit accounts for the year 1986-87 on the basis of a certificate given by the Managing Director as regards opening balances as on 1st April, 1986.
(ii) If only the accounts for the year 1986-87 are prepared and audited on the basis of the certificate of opening balances given by the Managing Director, what should be the extent of qualification in the audit report? The querist has requested the Committee to suggest the model qualification.
(iii) In case the accounts for the year 1986-87 are audited, will it be in order to include the last available audited figures, in the column specified for previous year’s figures, with a footnote to the balance sheet that the accounts for the subsequent years, till 31st March, 1986, were not prepared and audited?
Opinion September 7, 1988
1. The Committee notes that para 7 of the Statement on Standard Auditing Practices-5 (SAP 5) on ‘Audit Evidence’, issued by the Institute of Chartered Accountants of India, states as below:
“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.”
2. The Committee notes that para 3.7 of the Statement on Qualifications in Auditor’s Report, issued by the Institute of Chartered Accountants of India, has stated as under:
“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 give 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.”
3.The Committee further notes that Schedule VI to the Companies Act, 1956, prescribes disclosure of figures of the immediately preceding year for items shown in the balance sheet as well as those shown in the profit and loss account for the current year.
4. On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 4 of the query, is as below:
(i) The auditor should not normally rely on the certificate given by the Managing Director regarding the opening balances unless the said information is corroborated by other supporting documentary evidence.
(ii) From the facts and circumstances of the query, it is apparent that the auditor may not be in a position to form an opinion about the true and fair view of the accounts for the year 1986-87. He should, therefore, state so in his report. An example of such disclaimer of opinion is given below:
“The opening balances of items in the profit and loss account and the balance sheet are as per the certificate given by the Managing Director. We have, however, not been able to get any supporting evidence to confirm or refute the same. We are, therefore, unable to express an opinion as to whether the accounts give a true and fair view: -
(i) in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year; and
(ii) in the case of the profit and loss account, of the profit or loss for its financial year.”
(iii) The last available audited figures, i.e., for the year ended 31st March, 1977, cannot be given as figures for the immediately preceding year in the financial statements for the year 1986-87.
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