Winston Churchill once remarked, ‘“No comment’ is a splendid expression. I am using it again and again.” Auditors’ of companies do not have the liberty of using this term in their audit reports.
Audit Reports in India are guided by the Companies Act, 1956 — as amended — and the pronouncements of the Institute of Chartered Accountants of India, which, inter-alia, include the Companies Audit Report Order (CARO), issued in 2003 and revised in 2005.
CARO is a very comprehensive document that details audit requirements on 21 areas that could be part of an entity’s financial statements ranging from fixed assets to utilisation of IPO proceeds and frauds. CARO also includes thirteen appendixes that extract information from other Acts that need to be reported in CARO.
The UK Act
If one thought that the Companies Act, 1956 was gargantuan, a look at the Companies Act, 2006 in the UK would dwarf the former — it contains 1,300 sections and 16 schedules.
The sections regarding audit are fairly simplistic. The report must state clearly whether, in the auditor’s opinion, the annual accounts give a true and fair view of the state of affairs and the profit/loss of the company. The report needs to certify preparation of the financial statements in accordance with the Companies Act, 2006 as also the relevant financial reporting framework (normally IFRS).
Section 496 of the UK Companies Act asks the auditors to report whether in his opinion the information given in the directors’ report for the financial year for which the accounts are prepared is consistent with those accounts.
As per UK law, a part of the directors’ report is auditable which should form an integral part of the audit report including the directors’ remuneration.
The Act also states that the report of the auditor should be either qualified or unqualified, thereby giving a free reign to auditors to report/qualify on anything they find amiss. There are no CARO-like requirements under the Act. Section 507 of the Act punishes errant auditors with fines in case there are any offences in connection with the audit report.
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