Auditing is a profession which is destined to serve myriads of stakeholders like shareholders, lenders, creditors, analysts, credit rating agencies, tax authorities, governments   and other regulators etc.  The final output of an audit is the Audit Report.  The auditor’s duty is to express an opinion on the financial statement. The audit report is the auditor’s expression. Auditors are usually considered impassive and solemn persons!! And the audit report also resembles him by not having many shades. That is the auditors can express only four types of opinions namely unmodified opinion, qualified opinion, adverse opinion, disclaimer of opinion.  Through unmodified opinion auditors express that financial statements are prepared in all material respects in accordance with the applicable financial reporting framework and they give a true and fair view. I will dwell upon this after mentioning about the other ones also. Auditor gives a qualified opinion when financial statements are materially misstated but according to his judgment it doesn’t have a pervasive effect on the financial statement. This opinion is also given when he is unable to obtain sufficient appropriate audit evidence and according to his judgment, it does not have pervasive effect on financial statement. In case of pervasive and material misstatement he gives an adverse opinion. In case he is unable to obtain sufficient appropriate audit evidence and that in his judgement is having a pervasive effect on financial statement he gives a disclaimer of opinion.

This all point towards the fact that, the auditor is bothered only about the financial statements. He is insensitive towards the business of the entity. Usually auditor does not discuss further about the company (other than reporting aspect), unless in a situation where the going concern assumption is seriously at stake. Standards on Auditing (SA) 200(Revised) states that audit of financial statement do not ensure the future viability of the entity and the efficiency and effectiveness of the management[1]. This statement grossly limits the responsibility of the auditor and also undermines the usefulness of the audit from the vantage point of the investor. For instance during the course of the audit the auditor find out that company in investing heavily in a business line that is unviable and is creating losses. This may not be apparently disclosed anywhere in the annual report of the company. Auditor can very well raise a flag in such situations.  Similarly there may be obvious inefficiencies in the business process of the entity. I don’t find any harm in reporting about them to the stakeholders. If the audit opinions are made more agile and auditors review of the business process is included in his report I believe that it can be of great value to the investors. The company will also be able to cut the cost of appointing another consultant for this purpose.

Now I would like to tell you about the concept of ‘True and Fair’. As discussed earlier true and fair view is the pivot element of the audit report. ‘True and Fair view’ was substituted instead of ‘true and correct’ accepting that precision in accounting is a chimera. Although this principle prevails over specific legal requirements, it’s interesting to see that this concept has not been defined anywhere.  Because of the vagueness of this principle I really feel that this can be used as an alibi by erring auditors. Moreover I don’t think there is any investor in the world who conceives this idea fully. I really feel that audit report should give clearer and vivid picture rather than being just a compliance ritual. The past president of ICAI, CA. Amarjith Chopra has opined in various occasions that the auditors have to move beyond just presenting a true and fair view[2].

There is no other independent professional who is so closely associated with a company other than an auditor. So it would be of great value if his unique position is leveraged properly. The audit report can be enriched by including other matters and discussions other than just a report on financial statement.  I cannot think about any possible ramification if auditor is made to comment about the efficiency of the operations of the entity. I feel that this can be a fillip to proper and efficient management of the company. But I am not telling that auditor should be made to comment on each and everything. A set of guidelines may be given to the auditor for this purpose.  Here I would like to again quote CA. Amarjith Chopra: “Expressing an opinion merely on true and fair view may not be only aspect which society may expect the auditors to report upon.” [3]

Recently in United States, Public Company Accounting Oversight Board (PCAOB), the body which regulates audit profession published a ‘Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements and Related Amendments to PCAOB Standards[4]’. The same is open for public comments.  In that release PCAOB is mooting about expanding audit report and in some cases the auditor’s role so that it is more relevant and useful to investors and other users of financial statements. One of the suggestions PCAOB is considering is to include a supplemental narrative report, which some have described as an Auditor's Discussion and Analysis ("AD&A") to provide investors and other financial statement users with a view of the audit and the financial statements "through the auditor's eyes". Another alternative it is considering is to mandate the use of emphasis paragraphs in all audit reports and further expand the emphasis paragraph to highlight the most significant matters in the financial statements and to identify where these matters are disclosed in the financial statements. According to the concept release: “Emphasis paragraphs could be required in areas of critical importance to the financial  statements, including significant management judgments and estimates, areas with significant measurement uncertainty, and other areas that the auditor determines are important for a better understanding of the financial statement presentation. With respect to each matter of emphasis under this alternative, the auditor also could be required to comment on key audit procedures performed pertaining to the identified matters”

It is also considering about requiring the auditor to provide assurance on information outside the financial statements such as Management Discussion and Analysis (MD&A).

I feel that these proposals by PCAOB are steps in the right direction and they are relevant in the Indian context also. I also feel that these refreshing changes to the principles of auditing, if given effect can rejuvenate the auditors and the bean counter fraternity and help them to serve the business and investor community in a more meaningful and purposeful manner.

Bibliography

Auditing, Review and Other Standards issued by ICAI. (n.d.). Retrieved July 20, 2011, from http://www.icai.org/new_category.html?c_id=141

Basu, S. K. (2009). Fundamentals of Auditing. Pearson Education.

Board(PCAOB), P. C. (2011, June 21). PCAOB. Retrieved July 20, 2011, from http://pcaobus.org/Rules/Rulemaking/Docket034/Concept_Release.pdf

Chopra, A. (December 2010). Presidents Message. The Chartered Accountant , 6.

Economist, T. (2008, September 22). True and fair. Retrieved July 20, 2011, from The Economist: http://www.economist.com/node/12284475

McKenna, F. (2011, July 8). Auditors and Audit Reports: Is The Firm’s “John Hancock” Enough? Retrieved july 20, 2011, from Forbs: http://blogs.forbes.com/francinemckenna/2011/07/08/auditors-and-audit-reports-is-the-firms-john-hancock-enough/

By Vishnu Nair,

CA Final Student, Institute of Chartered Accountants of India