The concept of true and fair is a fundamental concept in auditing. The phrase “true and fair” in the auditor’s report signifies that the auditor is required to express his opinion as to whether the state of affairs and the results of the entity as ascertained by him in the course of his audit are truly and fairly represented in the accounts under audit. This requires that the auditor should examine the accounts with a view to verify that all assets, liabilities, income and expenses are stated as amounts which are in accordance with accounting principles and policies which are relevant and no material amount, item or transaction has been omitted. What constitutes “true and fair,” however, has not been defined in any legislation. In the context of audit of a company, however, section 211(5) of the Companies Act provides that the accounts of a company shall be deemed as not disclosing a true and fair view, if they do not disclose any matters which are required to be disclosed by virtue of provisions of Schedule VI to that Act, or by virtue of a notification or an order of the Central Government modifying the disclosure requirements. Therefore, the auditor will have to see that the accounts are drawn up in conformity with the provisions of Schedule VI and whether they contain all the matters required to be disclosed therein. In case of companies which are governed by special Acts, the auditor should see whether the disclosure requirements of the governing Act are complied with. Section 209(3) of the Companies Act, 1956 also contemplates that a company shall not be deemed to be maintaining proper books of account to show a true and fair accrual basis of accounting. It must be noted that the disclosure requirements
laid down by the law are the minimum requirements. If certain information is vital for showing a true and fair view, the accounts should disclose it even though there may not be a specific legal provision to do so. Thus, what constitutes a ‘true and fair’ view is a matter of an auditor’s judgment in the particular circumstances of a case. In more specific terms, to ensure true and fair view, an auditor has to see :
- that the assets are neither undervalued or overvalued, according to the applicable accounting principles,
- no material asset is omitted;
- the charge, if any, on assets are disclosed;
- material liabilities should not be omitted;
- the profit and loss account discloses all the matters required to be disclosed by Part II of Schedule VI and the balance sheet has been prepared in accordance with Part I of Schedule VI;
- accounting policies have been followed consistently;
- all unusual, exceptional or non-recurring items have been disclosed separately.
In this context, it is noteworthy that the Council of the Institute while issuing a clarification regarding authority attached to documents issued by the Institute also observed that, “The Companies Act 1956, as well as many other statutes require that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. However, what constitutes ‘true and fair’ view has not been defined either in the Companies Act, 1956 or in any other statute. The pronouncements of the Institute seek to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view. The
pronouncements issued by the Institute includes various statements, standards and guidance notes. Directors Responsibility Statement under section 217(2AA) requires that the Board’s Report shall state that, “that the directors had selected such accounting policies and applied them consistently and made judtgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period”.