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CASE STUDIES ON AUDIT REPORT
Date: 04.05.2019
PRESENTATION BY
CA. T.K. GUPTA 9810064006
CASE STUDY 1
1. X Pvt. Ltd. is a start-up & is two years old.
2. The company has made losses in both the years & half ofthe net worth has been wiped out.
3. Additional Facts
The company has tied up with a Private Equity (PE) forinvestment & is certain to receive funds which shouldbe able to cater its cash flows needs as per plan for thenext year and a half.
Q- How will you look at further evidences, conclude thisissue & report?
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY 1
Some Key Matters to be considered
1. The issue is relating to the Going Concern Assumptions on which accounts are prepared.
2. Is the PE an already existing investor with a pre agreed investment plan for next year?
3. Evidence of Possible investment of PE, the correspondence, any MOU, Valuation etc.
4. The cash flow projection looks reasonable considering the inflow of investment.
5. Subsequent events including any inflow of money.
6. Could we reasonably conclude that the company will continue as a Going Concern for the next one year?
CA. T.K. GUPTA
POSSIBLE REPORTING OPTION
• Assuming that there are sufficient & appropriationaudit evidence for the possible investment & cash flow,there is evidence of Going Concern assumption beingappropriate & at the most, a note in the FinancialStatement may be adequate. The fact evidencesgathered, judgement & the conclusion thereon shouldbe documented as part of documentation.
CA. T.K. GUPTA
CASE STUDY 2X Pvt. Ltd. completed 4 years from the starting date.
1. While it has not made any profit till date, it has turnedEBIDTA positive this year.
2. The Turnover has consistently increased at 100% from thefirst year.
3. The Net worth is just positive but will turn negative withlosses for another year without any capital inflow.
4. The company is in a niche area for Robotics Software & isconsidered to be next generation technology.
5. The equity share of the company of face value of Rs. 10 /-each has been valued at a premium of Rs. 200/- byindependent fair value specialists.
CA. T.K. GUPTA
6. Two or three PE’s are in the process of negotiating forpurchase of existing investor holding and/or additionalinvestment in the company.
7. In case the investment does not materialise, theoperation will be materially affected.
8. What further evidence will you look for & how will youconclude on the issue of Going Concern & Report.
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY 2
Negative factors
1. Consistent losses for 4 years.
2. Almost negative Networth.
3. Dependency on future capital inflow next year, not yet fully tied up.
4. Possible material uncertainty of cash flow in the next 12 months.
Positive Factors
1. The niche business in which the company is in consistent high growth.
2. Interest of PE’s to buy out existing investor.
3. High Fair Value (may not be important but indicates the business potential etc.)
CA. T.K. GUPTA
OTHER EVIDENCES TO BE LOOKED INTO 1. Business plans, Strategy, Investors communication, MOU
for investment, details of Board minutes etc.
2. There could be a material uncertainty of Going Concern,but there are mitigating factors to evidence that it isappropriate to continue with the fundamental accountingassumption for the year.
POSSIBLE REPORTING OPTION1. Note in the Financial Statement with details & potential
reporting in a separate heading “Material Uncertaintyrelated to “Going Concern’’ (SA 570 Revised) not amodified opinion.
CA. T.K. GUPTA
SA 570 Going ConcernAuditor Conclusion
1. Based on the audit evidence obtained in the auditors judgment amaterial uncertainty exist that may cast significant doubt on theentity’s ability to continue as going concern, appropriatedisclosure of the nature and implication of uncertainty isnecessary.
2. Use of Going Concern Basis of Accounting is Appropriate but aMaterial Uncertainty ExistsInclude a separate section in the Auditor’s Report which would explain thatmaterial uncertainty related to going concern exits.
3. Adequate Disclosure of Material Uncertainty is Not Made in the
Financial Statement.The auditor would express a qualified or an adverse opinion & is also a “KEYAUDIT MATTER”
CA. T.K. GUPTA
CASE STUDY 3
1. Y (Formerly X) Pvt. Ltd. has been in business of RoboticsSoftware for 6 years, in the last couple of years, its growthrate has come down drastically & the losses continue withnet worth fully eroded.
2. Its business is no longer exciting as the software does notcater to the sophisticated developments in mobile remoteapplications, which has become the norm in the last 2 years.
3. The company is no longer considered to be next generation.
4. The company had serve cash flows issue during the year andthe next year is expected to be much more uncertain.Operation will be affected without significant freshinvestment which are not clear at present.
CA. T.K. GUPTA
5. There is no proper cash flow projection for thenext one year.
6. There are pressing creditors which need to besettled as at year end & it is not clear how theywill be settled.
7. The company’s and its promoter’s ability toreuse funds is quite low at present.
8. The accounts are prepared as a going concern.How will you addresses this issue, conclude &report.
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY 31. Cumulative factors taken together indicate there is a possible material
uncertainty of Going Concern.2. It appears that the entity can continuing as a Going Concern only if
funding could be arranged. The ability to raise fund is quite low.3. It may be difficult to conclude that the going concern assumption is
appropriate or rather one may conclude it may not be appropriate.4. Document all the enquiries & evidences, documents the conclusion that
the Going Concern assumption is not appropriate.
REPORT1. Adverse Opinion as it is pervasive. As the fundamental basis itself is not
appropriate the financial statements do not show a true & fair view.
2. Modification of Report on Internal Control over financial reporting.
SA 705 – Para 6,7,8,9,10
CA. T.K. GUPTA
CASE STUDY 4
The Company has not stated the inventories at the lower ofcost and net realisable value (NRV) but has stated themsolely at cost, which constitutes, a departure from the AS-2“Valuation of Inventories.”
The company has not worked out the NRV. The amount ofinventories are material to the Financial Statement. Thecompany has made gross losses during the year whichindicate that the NRV could be lower but that does not givethe quantification of the potential impact.
Q-How would you conclude on this issue & report?CA. T.K. GUPTA
1. Non Compliance of AS-2 & its disclosure.
2. Impact on Financial Statement not computed
3. Inventory value is material to the Financial Statement
POSSIBLE OPTION
1. Qualify for Non-Compliance of AS -2
2. Qualify the IFCR for inventory valuation.
3. Disclaim on inventory & possibly the FinancialStatement.
DISCUSSION ON CASE STUDY – 4
CA. T.K. GUPTA
CASE STUDY-5 The company has not made provision of certain tradereceivables which are material.
The management has evaluated & anticipates that theamounts are collectable.
During the course of audit you become aware of the fact thatthere was a significant issues in the delivery of service. Themanagement has not considered this issue in theirevaluation.
The evidence suggests that the management evaluation isnot appropriate. The full amount or part of the amount seemto be doubtful of recovery.
Q- How could you conclude on this issue & deal in thereport?
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY - 5• Firstly, there seem to an issue in IFCR in respect of Material
item like Receivable. A significant issue on delivery of serviceshas not been considered when evaluating recoverability &provision for doubtful debts.
Option1. Qualify IFCR in respect of Internal Control over reporting on
receivables & Provision of doubtful receivables.2. Uncertainty of realization of material receivable &
inadequacy of provision.Option1. Qualify (if the amount could be determined) or disclaim
receivable. Disclaimer on Financial Statement may depend onhow significant is the amount. Document all facts andconclusion and how the judgement for the reporting wasmade.
CA. T.K. GUPTA
CASE STUDY 61. ABC Ltd. has a material investment in XYZ Co., Foreign
subsidiary whose net worth has been fully/ substantiallyeroded. The management has not provided any evidence ofhow they valued the investment to conclude on thecarrying amount. The auditor were also unable to obtainsufficient appropriate audit evidence about the carryingamount of ABC Ltd’s investment in XYZ Co. as at 31st March20XX, because they were denied access to the financialinformation, management & the auditors of XYZ Co.
Q- How will you conclude and report on this issue?
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -61. No evidence of any control in respect of valuation of
investment.2. Qualify the report of IFCR in respect of valuation of investment.
3. There are two issues on audit report:• Scope restriction as the auditor was not allowed to perform
his work.• The auditor has no sufficient evidence of valuation of
material investment.
REPORTING OPTION1. Qualify for first one
2. Qualify/disclaim the Second One.
3. If the restrictions on scope, is intentional and there are issueson integrity, the auditor may consider other options.
CA. T.K. GUPTA
CASE STUDY 7
The company has material foreign currency accountbalances at the end of the reporting period, whichare not paid/collected within the stipulated timeunder FEMA & related rules.
Q- How to treat this issue & is there need to report.
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -71. To consider the reasons for non-compliance.
2. Is the period very long & is it repetitive?
3. Is it under the control of the company e.g. where they are in a position topay or whether are able to collect in time, or there were collectabilitydelays.
NATURE & CIRCUMSTANCES
Ultimately what is the impact of Non Compliance on the Financial Statement? isthere high penalty which is to be provided ? is the penalty significantly affect theGoing Concern etc. (SA 250/ Possible effect)
POSSIBLE REPORTING OPTION
Depends on the materiality & Nature & Circumstances possible qualification ordisclaimer. Qualification of Reporting of IFCR should also be considered.
CA. T.K. GUPTA
CASE STUDY 8
The auditor had sent request for confirmation of receivable/payable/deposit balances. However, No replies werereceived, confirming the balances.
Your team draft a qualification as below:
Basis for Qualified Opinion: Confirmation of balanceshave not been received in respect of Receivables, Payables &Deposits. The possible effect of such non confirmation havenot been ascertained except for the possible impact of thematter referred to in the basis of Qualified Opinionparagraph.
Is it appropriate? If not what should be done.
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -81. In respect of these balances, confirmation is one of the audit
procedure.
2. Non receipts of confirmation has to be followed up by all alternativeaudit procedure.
3. e. g. verification of Sale, Purchase on service or payment giving riseto such balances. Other evidence like receipts or confirmation oftransaction, subsequent receipts, the operation of transaction in thataccount, so on & so forth.
4. The evidence gathered by all audit procedures should be evaluatedto ascertain whether they are sufficient & appropriate. If they are,then no modification of audit report is necessary.
5. Omnibus qualification of all balances not confirmed is not acompliance with Auditing Standards.
6. Qualified Opinion has to be specific & quantified. CA. T.K. GUPTA
In certain cases, confirmation will be an importantevidence & non confirmation may give rise toskepticism.e. g. Related Party Transaction
In case, the cumulative evidence of the tests carriedout are not satisfactory to conclude true & fair view,the auditor has to modify the report, but it has to befor specific balances, where such conclusion is notpossible.The reasons has be specified in the Basis for QualifiedOpinion or Disclaimer of Opinion.
CA. T.K. GUPTA
CASE STUDY 9
1. The auditor was appointed after year end & couldnot observe the counting of the PhysicalInventory for the period under audit.
2. How should this matter be dealt with?
3. What are the consideration & how will it affectreporting?
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -91. The important test which will be affected is the testing the
existence of inventories at the Balance Sheet date. Observation ofPhysical verification of inventories is an important test to obtainevidence on existence of inventory.
2. To consider how material is inventory to Financial Statement?
3. What is the system of control over Physical inventory by themanagement?
4. What are the alternative procedure which will give evidence inrespect of inventory like independent physical verification record,continuous stock taking system, subsequent verification & audit ofrecords etc. ?
5. To conclude whether there is sufficient & appropriate evidence fortesting the existence of inventory. If not, a qualified opinion is theonly option.
6. This could also affect the reporting on IFCR.CA. T.K. GUPTA
CASE STUDY 10Indian non- publicly traded company prepare Indian GAPP FinancialStatement.
A law suit alleges that the company has infringed certain patent rightsand claims royalties and damages. There were material financial claimsfor such infringements.
The company had filed a counter action and preliminary hearings &discovery proceedings on both actions are in progress.
The ultimate outcome of the matter can’t presently be determined andno provision for any liability that may result has been made in thefinancial statement.
The company makes relevant disclosure in the financial statementunder contingent liability.
Q-how is this issue to be dealt with in the audit report?CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -101. The main consideration is whether the item is a contingent
liability or not. Additional evidence to be gathered is legalopinion& detailed study of the facts and legal position of thecase.
2. It is a matter of judgment and has to be appropriately analysedand concluded & documented.
3. If it can be concluded that it is a contingent liability requiringonly disclosure then there may not be any further reporting.
4. In some cases, if the litigation is so material and there may beuncertainty regarding the court decision, an EOM may beincluded. It has to be noted that in EOM, there is an explicitmention that the report is not modified and there is indicationthat the auditor has agreed with the company or managementposition.
CA. T.K. GUPTA
CASE STUDY 11
Subsequent Events
1. Subsequent to the year end there was a major fire in one thefactory of the company, destroying most of the inventories. Noprovision is made for such loss in the Financial Statement.
2. Subsequent to the year end, it was known that a major debtorhad become bankrupt & the debt may not be realized. NoProvision is made in the Financial Statement as there was nosuch information till year end.
3. The company has significant foreign exchange exposures. Theforeign exchange fluctuates adversely after the year end, Noprovision is made for losses compared to the year-end rates.
Q- How will these matters be concluded & reported in the audit.CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -11
1. It is not an adjusting event & it has to be informed to theshareholder.
2. It is an adjusting subsequent event, it has an impact onthe realisability of the receivables at the year end. Nonconsideration & Non Provision may require modificationof report.
3. Non-adjusting – No reporting.
CA. T.K. GUPTA
CASE STUDY 12The company has income tax litigation of significantamounts for many years. The issue is similar for each year.No provision is made for the claim & the amount paid aretreated as Advance Income Tax. There is a detailed discloserin the notes of these cases as contingent liabilities.
How will you deal with this matter in the followingcircumstances :
1. The case is quite strong as many similar cases aredecided in favour of the assessee at Supreme Court level.
2. The matter is not determinable as there are varieddecision.
3. Similar matter have been clearly decided in favour ofDepartment and against the assessee by the SC recently.
CA. T.K. GUPTA
DISCUSSION ON CASE STUDY -12
1. The disclosure as contingent liability seems appropriate.
2. Should be appropriate, if the auditor concludes that it isso significant then report under EOM.
3. It may require a provision & Non Provision may requiremodification in the report.
CA. T.K. GUPTA
THANK YOU
CA. T.K. GUPTA
