ICAI releases Ready Reference of Different Industries For easy Audit; the Analysis of Modified Opinions

The Institute of Chartered Accountants of India (ICAI) has released the analysis of modified opinion, the ready reference of different industries having similar issues in the audit.

According to the President of ICAI CA. Aniket Sunil Talati, the analyses would be available as an e-booklet for the ease of use of the members, providing a handy reference for the members having similar issues in the similar industry.

Also, the search facility enabled on the key words for the ease of tracing the concerned issue across industry type. This would be helpful when the members as auditors are required to express a qualification/ EOM on similar issue(s) faced during the audit and need a reference to check the ways in which the other auditor(s) have dealt in a similar situation.

However, Members and Firms should keep in mind the provisions of Standards on Auditing, Guidance Notes and related pronouncements and suitably modify it to suit the facts, circumstances, and nature of the entity under audit.

The CAQD, in the context of this publication has analysed Audit reports pertaining to financial statements for the period ended March 31, 2022 issued in respect of 344 Companies listed on the Bombay Stock Exchange (BSE). The audit reports issued in respect of Standalone Financial Statements as well as Consolidated Financial Statements of such entities have been considered for the purpose of this analysis and publication.

Of the total 344 audit reports stated above and containing modified opinions, 317 reports were Qualified, 9 reports had adverse opinion & 18 reports had Disclaimer of Opinion. The analysis covered 93 types of industries as per the BSE classification and presented some interesting perspectives and insights including the following:

• Of the total modified reports, 126 annual reports have quantified the impact of the qualification on the P&L / Assets / Liabilities.
• 73% of all the modifications centred around 6 core themes of Going Concern, Financial Instruments, External Confirmations, Consideration of Laws & Regulations, Recording of Provisions, Contingent Assets & Liabilities.

SCOPE AND APPROACH

1. The purpose of the analysis is to serve as a ready reference for the members facing similar concerns during the audit.
2. To understand the major reasons for modifications in the Audit Report of the listed entities.
3. The Centre for Audit Quality Directorate analysed audit reports of 4261 companies listed on the Bombay Stock Exchange (BSE).
4. The audit reports for the year ended 31st March 2022 were considered for the purpose of analysis.
5. 344 of the reports had Modified Opinions.
6. Modified opinion is classified as Qualified Opinion, Adverse Opinion & Disclaimer of Opinion.
7. The Modifications as per BSE classification cover 93 industry types.
8. Modifications have been bucketed into various heads for the purpose of the analysis.
9. Analysis has been performed on modifications only, and not on the Emphasis of Matter paragraph has been performed
10. Management responses on the modifications have been included as per the information available in the Annual Report.
11. The CAQD has not considered the appropriateness of the Audit Modifications but has reproduced the modifications as is for the purpose of analysis.

Key Findings mentioned in the Analysis

The broad reasons for Modified Opinions expressed in Audit Reports are categorised under the following heads:

a) SA 250-Consideration of Laws and Regulations in an Audit of Financial Statements: In 88 audit reports, the auditors had expressed modifications owing to non-compliance of various provisions of Companies Act 2013, FEMA, Income-tax Act, GST, SEBI & RBI rules pertaining to NBFCs.

b) SA 505-External Confirmations: In the case of 126 audit reports, the auditors were unable to obtain confirmation from Third Parties to validate and confirm the balances as reflected in the financial statements.

c) SA 570-Going Concern: In the case of 154 audit reports, the auditors were of the opinion that material uncertainty existed in relation to the going concern status of the entity.

d) Ind AS 19-Employee Benefits: In 55 audit reports, the auditors had expressed modifications owing to non-compliance of the requirement under Ind AS 19 pertaining to employee benefits which include actuarial valuation, payments etc.

e) Ind AS 36-Impairment of Assets: In the case of 65 audit reports, either the impairment testing was not carried out by the management or the auditors were unable to comment on appropriateness of impairment assessments as undertaken.

f) Ind AS 37-Provisions, Contingent Liabilities and Contingent Assets: In 86 audit reports, the auditors had expressed modification owing to non-creation of provision under Ind AS 37, further in few cases matter was sub-judice and / or disputed.

g) Ind AS 109-Financial Instruments: In the case of 108 audit reports, either there was nonrecognition/ provision of interest amount or non-reconciliation/ confirmation of balances or non provisioning in the context of Expected Credit Losses.

h) Corporate Insolvency Resolution Process (CIRP) Under IBC: In the case of 36 audit reports, the companies were under the process of CIRP or were in the process of initiating insolvency proceedings.

i) Internal control over financial reporting (ICoFR): In the case of 47 audit reports, the auditors were of the opinion that either the internal controls were not operating effectively , or the companies had inadequate internal control.

It is advised to refer to the analysis booklet given below for more details.

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