Expression of opinion

When we speak of the objective, we rationalise the thinking process to formulate a set of attainable
goals, with reference to the circumstances, feasibility and constraints. In money matters, frauds and
errors are common place of occurrence. Apart from this, the statements of account have their own
purpose and use of portraying the financial state of affairs. The objective of audit, naturally, should be to
see that what the statements of account convey is true and not misleading and that such errors and
frauds do not exist as to distort what the accounts really should convey.
Till recently, the principal emphasis was on arithmetical accuracy; adequate attention was not paid to
appropriate application of accounting principles and disclosure, for ensuring preparation of accountingstatements in such a way as to enable the reader of the accounting statement to form a correct view of
the state of affairs. Quite a few managements took advantage of the situation and manipulated profit or
loss and assets and liabilities to highlight or conceal affairs according to their own design. This state of
affairs came up for consideration in the Royal Mail Steam Packet Company’s Case as a result of which
the Companies Acts of England and India were amended in 1948 and 1956 respectively to require the
auditor to state inter alia whether the statements of account are true and fair. This is what we can take
as the present day audit objective. The implication of the substitution of “true and correct” by “true and
fair” need to be understood. There has been a shift of emphasis from arithmetical accuracy to the
question of reliability to the financial statements. Mind you, a statement may be reliable even though
there are some errors or even frauds, provided they are not so big as to vitiate the picture. The word
“correct” was somewhat misplaced as the accounting largely consists of estimates.
However, you should not infer that the detection of errors and frauds is no longer an audit objective : it is
indeed an audit objective because statements of account drawn up from books containing serious
mistakes and fraudulent entries cannot be considered as a true and fair statement. To establish whether
the financial statements show a true and fair state of affairs, the auditors must carry out a process of
examination and verification and, if errors and frauds exist they would come to his notice in the ordinary
course of checking. But detection of errors and frauds is not the primary aim of audit; the primary aim is
the establishment of a degree of reliability of the annual statements of account.
If there remains a deep laid fraud in the accounts, which in the normal course of examination of
accounts may not come to light, it will not be construed as failure of audit, provided the auditor was not
negligent in the carrying out his normal work. This principle was established as early as in 1896 in the
leading case in Re-Kingston Cotton Mills Co.
The nature of audit objectives was also highlighted in the leading case Re The London and General
Bank Ltd. [1895]. It was held that an auditor must ascertain that the books of account show the true
financial position of the company. For the first time, the duties of the company auditor were spelled out
in specific terms. Lord Justice Lindley observed, “It is no part of an auditor’s duty to give advice either to
directors or shareholders as to what they ought to do. An auditor has nothing to do with the prudence or
imprudence of making loans without security. It is nothing to him whether the business of company is
being conducted prudently or unprudently, profitably or unprofitably; it is nothing to him whether
dividends are properly or improperly declared, provided he discharges his own duty to the shareholders.
His business is to ascertain and state the true financial position of the company at the time of the audit
and his duty is confined to that.”
(Note : Appendix I deal with summary of certain leading case laws. A careful reading of such case laws
would not only provide you a peep into the historical evolution of auditing but enable you to master the
subject of auditing by developing understanding about audit objective, role of an auditor, scope of an
audit and how an auditor should proceed about his work).
The AAS-2 “Objective and Scope of the Audit of Financial Statements” states that the objective of anaudit of financial statements, prepared within a framework of recognised accounting policies and
practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on
such financial statements. Further it clarifies that “the auditor’s opinion helps determination of the true
and fair view of the financial position and operating results of the enterprise. The user, however, should
not assume that the auditor’s opinion is an assurance as to the future viability of an enterprise or the
efficiency or effectiveness with which the management has conducted the affairs of the enterprise”. So
it follows from above that it is no part of the auditor’s duty to probe into the propriety of business
conduct. This contention has been held perfectly valid as it has been asserted that the conventional
financial audit is concerned with examination of the transactions to ascertain the true and fair nature of
the financial statements. The auditor is merely concerned with evaluating the evidence in support of
transactions but need not examine the regularity and prudence of various decisions taken by the
management.
However, of late, this has undergone a change as some of the requirements of law introduced in the
past require the company auditor to go beyond the functions of reporting and express an opinion about
the propriety or prudence of certain transactions in certain specific areas. Sub-sections (1A) and (4A) of
the section 227 of the Companies Act, 1956 contain various such matters. It may also be clarified that
the usage of words “true and fair” is restricted to certain countries such as U.K. while in other countries
like United States the expression “full and fair” is prevalent. However both expressions aim to convey
same meaning.
On a consideration of what has been discussed, it may be summed up that auditing has the principal
objective of seeing whether or not the financial statement portray a true and fair state of affair and of
reporting accordingly. An incidental and secondary, but by no means an insignificant audit objective,
flowing from the former, is detection of errors and frauds and making recommendations to prevent their
occurrence. Expression of opinion