A PROJECT REPORT ON

AUDIT REPORT

SUBMITTED BY

SHRIKANT SAHU

ROLL NO: 32

M.COM. SEM- IV

(ADVANCE AUDITING)

ACADEMIC YEAR: 2016-17

UNDER THE GUIDANCE OF PROJECT GUIDE

PROF.SUJATA

SUBMITTED TO UNIVERSITY OF MUMBAI,

V.K.KRISHNA MENON COLLEGE OF COMMERCE AND SCIENCE

BHANDUP (EAST) MUMBAI - 400042

 CERTIFICATE

I, Prof. SUJATA, Hereby Certify That SHRIKANT SAHU. Of V.K.

KRISHNA MENON COLLEGE COMMERCE AND SCIENCE,

BHANDUP (EAST), Mumbai -400042 of M.Com Part II (ADVANCE

AUDITING) Has Completed His Project On STANDARDS ON

AUDITING

During The Academic Year 2016-17 The Information Submitted Is True

And Original To The Best Of My Knowledge.

____________________ ___________________

Project Guide External guide

_____________________ ___________________

Co-coordinator Principal
 DECLARATION FROM THE

STUDENT

I SHRIKANT SAHU . ROLL NO :- 32, Student of V.K. KRISHNA

MENON College Of Commerce and Science, Bhandup (EAST) Mumbai

400042, studying in M.Com Part- II hereby declare that I have completed

the project on ADVANCE AUDITING under the guidance of project

guide Prof. SUJATA during the academic year 2016-17. The information

submitted is true to the best of my knowledge.

Date: Signature

Place: Bhandup
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Principal of

V.K.Krishna Menon College of Bhandup,(Ms Saroj Phadnis) and our

project guide Prof. SUJATA. for providing me an opportunity to do

my project work on ADVANCE AUDITING. I also wish to express

my sincere gratitude to the non - teaching staff of our college. I

sincerely thank to all of them in helping me to carrying out this

project work. Last but not the least, I wish to avail myself of this

opportunity, to express a sense of gratitude and love to my friends

and my beloved parents for their mutual support, strength, help

and for everything.

PLACE: BHANDUP DATE :

 INDEX
S. No. Particulars Page No.

1. 1-4
Auditor's report on financial
statements

2. Unqualified Opinion 5-10

3. ADVERSE OPINION 11-14

4. Disclaimer of Opinion report 15-16

5. Report to the audit committee or 17-19

board

6. AUDIT REPORT FORMATE 20-27

7. Case Study 28-35
8. Bibliography 36

AUDIT REPORT
The auditor's report is a disclaimer thereof, issued by either an internal
auditor or an independent external auditor as a result of an internal or
external audit, as an assurance service in order for the user to make
decisions based on the results of the audit.

An auditor's report is considered an essential tool when reporting

financial information to users, particularly in business. Since many third-
party users prefer, or even require financial information to be certified by
an independent external auditor, many auditees rely on auditor reports to
certify their information in order to attract investors, obtain loans, and
improve public appearance. Some have even stated that financial
information without an auditor's report is "essentially worthless" for
investing purposes.[1]

Auditor's report on financial statements

It is important to note that auditor's reports on financial statements are

neither evaluations nor any other similar determination used to evaluate
entities in order to make a decision. The report is only an opinion on
whether the information presented is correct and free from material
misstatements, whereas all other determinations are left for the user to
decide.

There are four common types of auditor's reports, each one presenting a
different situation encountered during the auditor's work. The four reports
are as follows:

Unqualified Opinion[edit]

An opinion is said to be unqualified, or unmodified, when the Auditor

concludes that the Financial Statements give a true and fair view in
accordance with the financial reporting framework used for the
preparation and presentation of the Financial Statements. An Auditor
gives a Clean opinion or Unqualified Opinion when he or she does not
have any significant reservation in respect of matters contained in the
Financial Statements. The most frequent type of report is referred to as
the "Unqualified Opinion", and is regarded by many as the equivalent of
a "clean bill of health" to a patient, which has led many to call it the
"Clean Opinion", but in reality it is not a clean bill of health, because the
Auditor can only provide reasonable assurance regarding the Financial
Statements, not the health of the company itself, or the integrity of
company records not part of the foundation of the Financial Statements.
[2]
This type of report is issued by an auditor when the financial
statements are free of material misstatements and are presented fairly in
accordance with the Generally Accepted Accounting Principles (GAAP),
which in other words means that the company's financial condition,
position, and operations are fairly presented in the financial statements.
It is the best type of report an auditee may receive from an external
auditor.

An Unqualified Opinion indicates the following

(1) The Financial Statements have been prepared using the Generally
Accepted Accounting Principles which have been consistently applied;

(2) The Financial Statements comply with relevant statutory

requirements and regulations;

(3) There is adequate disclosure of all material matters relevant to the

proper presentation of the financial information subject to statutory
requirements, where applicable;

(4) Any changes in the accounting principles or in the method of their

application and the effects thereof have been properly determined and
disclosed in the Financial Statements.

The report consists of a title and header, a main body, the auditor's
signature and address, and the report's issuance date. US auditing
standards require that the title includes "independent" to convey to the
user that the report was unbiased in all respects. Traditionally, the main
body of the unqualified report consists of three main paragraphs, each
with distinct standard wording and individual purpose. Nonetheless,
certain auditors (including PricewaterhouseCoopers[1]) have since
modified the arrangement of the main body (but not the wording) in order
to differentiate themselves from other audit firms, even though such
modification is contrary to the clarified US AICPA standards on auditing.
The first paragraph (commonly referred to as the introductory
paragraph) states the audit work performed and identifies the
responsibilities of the auditor and the auditee in relation to the financial
statements. The second paragraph (commonly referred to as the scope
paragraph) details the scope of audit work, provides a general
description of the nature of the work, examples of procedures performed,
and any limitations the audit faced based on the nature of the work. This
paragraph also states that the audit was performed in accordance with
the country's prevailing generally accepted auditing standards and
regulations. The third paragraph (commonly referred to as the opinion
paragraph) simply states the auditor's opinion on the financial
statements and whether they are in accordance with generally accepted
accounting principles.[1]

The following is an example of a standard unqualified auditor's report on

financial statements as it is used in most countries, using the name ABC
Company as an auditee's name. Note that this report is acceptable only
for periods ending before December 15, 2012:

INDEPENDENT AUDITOR'S REPORT

Board of Directors, Stockholders, Owners, and/or Management of

ABC Company, Inc.
123 Main St.
Anytown, Any Country

We have audited the accompanying balance sheet of ABC Company,

Inc. (the "Company") as of December 31, 20XX and the related
statements of income, retained earnings, and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally

accepted in (the country where the report is issued). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,

in all material respects, the financial position of the Company as of
December 31, 20XX, and the results of its operations and its cash flows
for the year then ended in accordance with generally accepted
accounting principles in (the country where the report is issued).

AUDITOR'S SIGNATURE
Auditor's name and address

Date = Last day of any significant field work

This date should not be dated earlier than when the auditor has sufficient
audit evidence to support the opinion.

Recently modifications have been made by the PCAOB to the opinion

in the independent auditors report. These changes can be attributed to
the introduction of SAS No. 122 and SAS No. 123. [3] For periods
ending after December 15, 2012, the following is an example of a
standard unqualified auditor's report on financial statements as it is used
in most countries, using the name ABC Company, which was
incorporated in California, as an auditee's name:

INDEPENDENT AUDITOR'S REPORT

Board of Directors, Stockholders, Owners, and/or Management of

ABC Company, Inc.
123 Main St.
Anytown, Any Country
We have audited the accompanying financial statements of ABC
Company, Inc. (a California corporation), which comprise the balance
sheet as of December 31, 20XX, and the related statements of income,
retained earnings, and cash flows for the year then ended, and the
related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of

these consolidated financial statements in accordance with U.S.
generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated

financial statements based on our audit. We conducted our audit in
accordance with U.S. generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about

the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditors' judgment, including
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity's internal control. Accordingly, we express
no such opinion. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly,

in all material respects, the financial position of ABC Company, Inc. as of
December 31, 20XX, and the results of its operations and its cash flows
for the year then ended in accordance with U.S. generally accepted
accounting principles.

AUDITOR'S SIGNATURE
Auditor's name and address

Date = Last day of any significant field work

This date should not be dated earlier than when the auditor has sufficient
audit evidence to support the opinion.

Qualified Opinion report

Qualified report is given by the auditor in either of these two cases:

1. When the financial statements are materially misstated due to

misstatement in one particular account balance, class of
transaction or disclosure that does not have pervasive effect on
the financial statements.

2. When the auditor is unable to obtain audit evidence regarding

particular account balance, class of transaction or disclosure that
does not have pervasive effect on the financial statements.
The report is mostly like a Clear Opinion Report and only includes a
paragraph viz. Basis for Qualification after Scope paragraph and before
Opinion paragraph. Opinion paragraph in addition to its standard
wording includes except for the matter described in Basis for
Qualification paragraph the financial statements give true and fair view.
Detailed below:
A Qualified Opinion report is issued when the auditor encountered one
of the two types of situations which do not comply with generally
accepted accounting principles, however the rest of the financial
statements are fairly presented. This type of opinion is very similar to an
unqualified or "clean opinion", but the report states that the financial
statements are fairly presented with a certain exception which is
otherwise misstated. The two types of situations which would cause an
auditor to issue this opinion over the Unqualified opinion are:

Single deviation from GAAP this type of qualification occurs

when one or more areas of the financial statements do not conform
with GAAP (e.g. are misstated), but do not affect the rest of the
financial statements from being fairly presented when taken as a
whole. Examples of this include a company dedicated to a retail
business that did not correctly calculate the depreciation expense of
its building. Even if this expense is considered material, since the rest
of the financial statements do conform with gaap, then the auditor
qualifies the opinion by describing the depreciation misstatement in
the report and continues to issue a clean opinion on the rest of the
financial statements.

Limitation of scope this type of qualification occurs when the

auditor could not audit one or more areas of the financial statements,
and although they could not be verified, the rest of the financial
statements were audited and they conform to GAAP. Examples of this
include an auditor not being able to observe and test a company's
inventory of goods. If the auditor audited the rest of the financial
statements and is reasonably sure that they conform with GAAP, then
the auditor simply states that the financial statements are fairly
presented, with the exception of the inventory which could not be
audited.
The wording of the qualified report is very similar to the Unqualified
opinion, but an explanatory paragraph is added to explain the reasons
for the qualification after the scope paragraph but before the opinion
paragraph. The introductory paragraph is left exactly the same as in the
unqualified opinion, while the scope and the opinion paragraphs receive
a slight modification in line with the qualification in the explanatory
paragraph.
The scope paragraph is edited to include the following phrase in the first
sentence, so that the user may be immediately aware of the
qualification. This placement also informs the user that, except for the
qualification, the rest of the audit was performed without qualifications:
 "Except as discussed in the following paragraph, we conducted our
audit..."
The opinion paragraph is also edited to include an additional phrase
in the first sentence, so that the user is reminded that the auditor's
opinion explicitly excludes the qualification expressed. Depending on
the type of qualification, the phrase is edited to either state the
qualification and the adjustments needed to correct it, or state
the scope limitation and that adjustments could have but not
necessarily been required in order to correct it.
For a qualification arising from a deviation from GAAP, the following
phrase is added to the opinion paragraph, using the depreciation
example mentioned above:
"In our opinion, except for the effects of the Company's incorrect
determination of depreciation expense, the financial statement
referred to in the first paragraph presents fairly, in all material
respects, the financial position of"
For a qualification arising from a scope of limitation, the following
phrase is added to the opinion paragraph, using the inventory
example mentioned above:
"In our opinion, except for the effects of such adjustments, if any,
as might have been determined to be necessary had we been able
to perform proper tests and procedures on the Company's
inventory, the financial statement referred to in the first paragraph
presents fairly, in all material respects, the financial position of

Adverse Opinion report

An Adverse Opinion Report is issued on the financial statements of a

company when the financial statements are materially misstated and
such misstatements have pervasive effect on the financial statements.

In Audit Report after Scope paragraph but before Opinion paragraph,

Basis for Adverse Opinion paragraph is added. In Opinion paragraph the
wording changes to, "Because of situations mentioned in Basis for
Adverse Opinion paragraph, in our opinion the financial statements of
XYZ Co. Ltd. as mentioned in first paragraph does not give true and fair
view/are not free from material misstatements."
An Adverse Opinion is issued when the auditor determines that the
financial statements of an auditee are materially misstated and, when
considered as a whole, do not conform with GAAP. It is considered the
opposite of an unqualified or clean opinion, essentially stating that the
information contained is materially incorrect, unreliable, and inaccurate
in order to assess the auditee's financial position and results of
operations. Investors, lending institutions, and governments very rarely
accept an auditee's financial statements if the auditor issued an adverse
opinion, and usually request the auditee to correct the financial
statements and obtain another audit report.

Generally, an adverse opinion is only given if the financial statements

pervasively differ from GAAP.[4] An example of such a situation would be
failure of a company to consolidate a material subsidiary.

The wording of the adverse report is similar to the qualified report. The
scope paragraph is modified accordingly and an explanatory paragraph
is added to explain the reason for the adverse opinion after the scope
paragraph but before the opinion paragraph. However, the most
significant change in the adverse report from the qualified report is in the
opinion paragraph, where the auditor clearly states that the financial
statements are not in accordance with GAAP, which means that they, as
a whole, are unreliable, inaccurate, and do not present a fair view of the
auditee's position and operations.

Disclaimer of Opinion report

A Disclaimer of Opinion is issued in either of the following cases:

When the auditor is not independent or when there is conflict of

interest.

When the limitation on scope is imposed by client, as a result the

auditor is unable to obtain sufficient appropriate audit evidence.

When there are significant uncertainties in the business of client.

The audit report changes significantly when there is Disclaimer of
opinion. An additional paragraph "Basis for Disclaimer" is added in audit
report which is placed after Scope paragraph and before Opinion
paragraph. In Scope paragraph the wording changes to "We were
engaged to audit the financial statements of XYZ Co. Ltd." from "We
have audited the financial statements of XYZ Co. Ltd." In Opinion
paragraph wording changes to "We do not express an opinion on the
financial statements of XYZ Co. Ltd. due to situations explained in Basis
for Disclaimer paragraph"
A Disclaimer of Opinion, commonly referred to simply as a Disclaimer,
is issued when the auditor could not form and consequently refuses to
present an opinion on the financial statements. This type of report is
issued when the auditor tried to audit an entity but could not complete
the work due to various reasons and does not issue an opinion. The
disclaimer of opinion report can be traced back to 1949, when the
Statement on Auditing Procedure No. 23: Recommendation Made To
Clarify Accountant's Representations When Opinion Is Not
Expressed was published in order to provide guidance to auditors in
presenting a disclaimer.[5]
Statements on Auditing Standards (SAS) provide certain situations
where a disclaimer of opinion may be appropriate:

A lack of independence, or material conflict(s) of interest, exist

between the auditor and the auditee (SAS No. 26)

There are significant scope limitations, whether intentional or not,

which hinder the auditor's work in obtaining evidence and performing
procedures (SAS No. 58);

There is a substantial doubt about the auditee's ability to continue

as a going concern or, in other words, continue operating (SAS No.
59)

There are significant uncertainties within the auditee (SAS No. 79).
Although this type of opinion is rarely used, [5] the most common
examples where disclaimers are issued include audits where the auditee
willfully hides or refuses to provide evidence and information to the
auditor in significant areas of the financial statements, where the auditee
is facing significant legal and litigation issues in which the outcome is
uncertain (usually government investigations), and where the auditee
has going concern issues (the auditee may not continue operating in the
near future).[5] Investors, lending institutions, and governments typically
reject an auditee's financial statements if the auditor disclaimed an
opinion, and will request the auditee to correct the situations the auditor
mentioned and obtain another audit report.
A disclaimer of opinion differs substantially from the rest of the auditor's
reports because it provides very little information regarding the audit
itself, and includes an explanatory paragraph stating the reasons for the
disclaimer. Although the report still contains the letterhead, the auditee's
name and address, the auditor's signature and address, and the report's
issuance date, every other paragraph is modified extensively, and the
scope paragraph is entirely omitted since the auditor is basically stating
that an audit could not be realized.
In the introductory paragraph, the first phrase changes from "We have
audited" to "We were engaged to audit" in order to let the user know that
the auditee commissioned an audit, but does not mention that the
auditor necessarily completed the audit. Additionally, since the audit was
not completely and/or adequately performed, the auditor refuses to
accept any responsibility by omitting the last sentence of the paragraph.
The scope paragraph is omitted in its entirety since, effectively, no audit
was performed. Similar to the qualified and the adverse opinions, the
auditor must briefly discuss the situations for the disclaimer in an
explanatory paragraph. Finally, the opinion paragraph changes
completely, stating that an opinion could not be formed and is not
expressed because of the situations mentioned in the previous
paragraphs.

Auditor's report on internal controls of public companies

Following the enactment of the Sarbanes-Oxley Act of 2002, the Public

Company Accounting Oversight Board (PCAOB) was established in
order to monitor, regulate, inspect, and discipline audit and public
accounting firms of public companies. The PCAOB Auditing Standards
No. 2 now requires auditors of public companies to include an additional
disclosure in the opinion report regarding the auditee's internal controls,
and to opine about the company's and auditor's assessment on the
company's internal controls over financial reporting. These new
requirements are commonly referred to as the COSO Opinion.

The auditor's report is modified to include all necessary disclosures by

either presenting the report subsequent to the report on the financial
statements, or combining both reports into one auditor's report. The
following is an example of the former version of adding a separate report
immediately after the auditor's report on financial statements.
Going concern

Going concern is a term [2] which means that an entity will continue to
operate in the near future which is generally more than next 12 months,
so long as it generates or obtains enough resources to operate. If the
auditee is not a going concern, it means that the entity might not be able
to sustain itself within the next twelve months. Auditors are required to
consider the going concern of an auditee before issuing a report. [6] If the
auditee is a going concern, the auditor does not modify his/her report in
any way. However, if the auditor considers that the auditee is not a going
concern, or will not be a going concern in the near future, then the
auditor is required to include an explanatory paragraph before the
opinion paragraph or following the opinion papragraph, in the audit
report explaining the situation,[6][7] which is commonly referred to as
the going concern disclosure. Such an opinion is called an
"unqualified modified opinion".

Unfortunately, many auditors are increasingly reluctant to include this

disclosure in their opinions, since it is considered a "self-fulfilling
prophecy" by some.[6] This is because a disclosure for a lack of going
concern is viewed negatively by investors, lending institutions, and credit
agencies, and therefore reduces the chance that the auditee may obtain
the capital or borrowing it needs to survive once the disclosure is made.
If this situation occurs, the auditee is more likely to stop being a going
concern while the auditor loses potential future audit engagements, and
so the auditor may be pressured to avoid including a going concern
disclosure. In a study performed on 2001 bankruptcies, nearly half (48%)
of selected public companies who faced bankruptcy in 2001 did not have
a "going concern disclosure" in the previous auditor's reports.
[6]
Additionally, 12 of the 20 largest bankruptcies in U.S. history occurred
between 2001 and 2002 and none of them had a "going concern
disclosure" in their previous auditor's report.[6]

As for the actual wording of the auditor's report, when a lack of going
concern is determined by the auditor, the disclosure paragraph should
state the situation, state the auditor's determination, and state the
auditee's plan to correct the situation. The disclosure paragraph should
immediately follow the opinion paragraph.

Other explanatory information and paragraphs

Although the auditor reports mentioned above are the standard reports
for financial statement audits, the auditor may add additional information
to the report if it is deemed necessary without changing the overall
opinion of the report. Usually, this additional information is included after
the opinion paragraph, although some situations require that the
additional information be included in paragraphs before the opinion
paragraph. The most frequent paragraphs include:

Limiting distribution of the report In some occasions, the audit

report is restricted to a specified user and the auditor includes this
restriction in the report, such as a report for financial statements
made in cash basis which are prepared for tax purposes only,
financial statements for a wholly owned subsidiary whose sole user of
its financial statements is its parent company, etc.

Additional or supplemental information Certain auditees include

additional and/or supplemental information with their financial
statements which is not directly related to the financial statements.
Examples due to size, time, location, and/or technical constraints.
When the main auditor has to rely on another auditor's work, the main
auditor may either accept responsibility for the component's
information and not modify the audit report, or may chose to disclaim
the audit on the specific component, stating that the main auditor did
not audit the component, that another auditor audited the component,
that the component's audited information is therefore the
responsibility of another auditor, and that the main auditor is simply
including it in the original auditee's information. If used, this
disclaimer is usually included in the introductory paragraph.

Report to the audit committee or board

The auditor's report on the financial statements typically provides very
limited details on the procedures and findings of the audit. In contrast,
auditors provide much more detail to the board of directors or to
the audit committee of the board. Beginning in 2002, many countries
have tasked the audit committee with primary responsibility over the
audit.[10] For example, in the United States, section 204 of the Sarbanes-
Oxley Act passed in 2002[11] required auditors to communicate certain
information to audit committees, which were required to be entirely
independent, and also made the audit committee responsible for the
auditor's hiring.[12] In August 2012, the U.S. Public Company Accounting
Oversight Board finalized Auditing Standard No. 16, [13] which requires
additional communications to the audit committee. [14]