The following paragraphs deal with the manner of qualification and the manner of disclosure, if any, to be made in the auditor’s report.

In the case of a company, members should quality their audit reports in case –

  1.  accounting policies required to be disclosed under Schedule VI or any other provisions of the Companies Act, 1956 have not been disclosed, or
  2.  accounts have not been prepared on accrual basis, or
  3.  the fundamental accounting assumption of going concern has not been followed and this fact has not been disclosed in the financial statements, or
  4. proper disclosures regarding changes in the accounting policies have not been made.

Where a company has been given a specific exemption regarding any of the matters stated above but the fact of such exemption has not been adequately disclosed in the accounts, the member should mention the fact of exemption in his audit report without necessarily making it a subject matter of audit
qualification. In view of the above, the auditor will have to consider different circumstances whether the audit report has to be qualified or only disclosures have to be given. In the case of enterprises not governed by the Companies Act, 1956, the member should examine the relevant statute and make suitable qualification in his audit report in case adequate disclosures regarding accounting policies have not been made as per the statutory requirements. Similarly, the member should examine if the fundamental accounting assumptions have been followed in preparing the financial statements or not. In appropriate cases, he should consider whether, keeping in view the requirements of the applicable laws, a qualification in his report is necessary. In the event of non-compliance by enterprises not governed by the Companies Act, 1956, in situations where the relevant statute does not require such disclosures to be made, the member should make adequate disclosure in his audit report without necessarily making it a subject matter of audit qualification.

In making a qualification / disclosure in the audit report, the auditor should consider the materiality of the relevant item. Thus, the auditor need not make qualification / disclosure in respect of items which, in his judgement, are not material. A disclosure, which is not a subject matter of audit qualification, should be made in the auditor’s report in a manner that it is clear to the reader that the disclosure does not constitute an audit qualification. The paragraph containing the auditor’s opinion on true and fair view should not include a reference to the paragraph containing the aforesaid disclosure.
Examples of Disclosures
Where a partnership firm does not make adequate disclosures regarding the revaluation of its fixed assets. “During the year, the enterprise revalued its land and buildings. The revalued amounts of land and buildings are adequately disclosed in the balance sheet. However, the method adopted to compute the revalued amounts has not been disclosed, which is contrary to Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’ issued by the Institute of Chartered Accountants of India. We report that………”

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