BOARD COMMITTEE

The Board of Directors are ultimately responsible for the acts of the committee. Board is responsible for defining the committee role and structure. The structure of a board and the planning of the board’s work are key elements to effective governance. Establishing committees is one way of managing the work of the board, thereby strengthening the board’s governance role. Board should regularly review its own structure and performance and whether it has the right committee structure and an appropriate scheme of delegation from the board.

One of the most important committee is the audit committee

Audit Committee

Audit Committee is one of the main pillars of the corporate governance mechanism in any company. Charged with the principal oversight of financial reporting and disclosure, the Audit Committee aims to enhance the confidence in the integrity of the company’s financial reporting, the internal control processes and procedures and the risk management systems.

Applicability:

Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, provides that the Board of Directors of following companies are required to constitute an Audit Committee of the Board-

(i) Every Listed Public Company

 (ii) Public Companies having paid up share capital of Rs. 10 Crore or more; or

 (iii) Public Companies having turnover of Rs. 100 Crore or more; or

 (iv) Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 Crore

The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account for the purposes of this rule. The following classes of unlisted public company shall not be covered for above purpose: -

(a) a joint venture;

(b) a wholly owned subsidiary; and

 (c) a dormant company as defined under section 455 of the Companies Act, 2013.

Composition of Audit Committee:

Under the Companies Act, 2013:

· The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.

· The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statements

· The chairperson of the audit committee shall be an independent director.

· The Company Secretary shall act as the secretary to the audit committee.

Functions of the Audit Committee Section 177(4) of the Companies Act, 2013 provides that every audit committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include, –

· the recommendation for appointment, remuneration and terms of appointment of auditors of the company;

· review and monitor the auditor’s independence and performance, and effectiveness of audit process;

· examination of the financial statement and the auditors’ report thereon;

· approval or any subsequent modification of transactions of the company with related parties;

The Audit Process

 

PHASE-I

 

PHASE-II

 

PHASE-III

PHASE-IV

Audit tool

Evidences are very important for an Auditor to form an opinion regarding financial statements. If Auditor fails to collect proper evidence, it will reduce the reliability of audit report. The method of collecting evidence is called audit technique. Following are a few important audit techniques −

Vouching

When the Auditor verifies accounting transactions with documentary evidence, it is called vouching. Through vouching, the Auditor verifies authority and authenticity of records.

Confirmation

Confirmation is a technique used by an Auditor to validate the correctness of the transactions; for example, an Auditor obtains written statement directly from debtors to confirm the debtors balance as appeared in the books of client.

Reconciliation

Reconciliation is a technique used by an Auditor to know the reason of differences in balances. For example, to know the difference in the bank book of the client and the bank balance as appeared in the bank statement or pass book, the Auditor prepares the reconciliation statement. The same method may be used for debtors, creditors, etc.

Testing

Testing is a technique of selecting representative transactions out of whole accounting data to draw a conclusion about all items.

Physical Examination

Physical examination requires verification and confirmation of the physical existence of tangible assets as appears in the Balance Sheet like cash in hand, land and building, plant and machinery, etc.

Analysis

Analysis is technique used by an Auditor to segregate important facts and to further study their relationship.

Scanning

By scanning of books of accounts, an experienced Auditor can identify those entries which would require his attention. It is also called scrutiny of accounts.

Inquiry

This method is used to collect in-depth information about any transaction.

Verification of Posting

To verify posting from books of original entry to ledger account and confirm the balance, an Auditor is required to verify the postings; for example, to verify a sale book, an Auditor may verify postings from the sale register to the sale ledger. He may further calculate balances of the sale register and the sale book.

Flow Chart

The Flow Chart technique is used by an Auditor to determine the stages of transaction and the generation of documents at all levels of transactions.

Observations

Through observation, an Auditor get an idea about reliability of the process and the procedure of an organization.

Audit & Auditors Report

A person who conducts an audit is an auditor. An auditor is a professional that accumulates and evaluates evidence to report whether the company complies with the established set of procedures or standards. An auditor may function as an employee or an independent professional.

NEED AND IMPORTANCE

The relevance of auditor's report is governed by the following major provisions of the Companies Act:

1 that at every annual general meeting of a company, the Board of Directors of the company shall lay before the company:

(a) a Balance Sheet as at the end of the period; and

(b) a Profit and Loss Account for that period

2 that every Balance Sheet of a company shall give a true and fair view of the state of affairs of a company as at the end of the financial year and every Profit and Loss Account shall give a true and fair view of the profit or loss of the company for the financial year.

3 that the Profit and Loss Account shall be annexed to the Balance Sheet and the auditor's report shall be attached thereto.

The members of a company do extend their trust, faith and confidence to the report submitted by the auditors who are appointed to check the correctness and the fairness of the financial statements.

In fact, the report offers an opportunity to the auditors to explain to the entire body of shareholders what they consider significant and relevant information relating to the financial position of the company for the period under reporting. It thus serves the following purposes.

1 It substantiates that the contents of the financial statements of the company represent a true state of affairs of the business.

2 Besides being an instrument of information to the shareholders of the company, it equally offers an opportunity to bankers, creditors, financial institutions and potential investors of the market to get reliable insight into the financial position of the company as demonstrated by its profit loss and assets  liabilities.

3 Duly supported by professional expertise, Statutory powers and performance independence, an auditor's report is an indicator of fairness of opinion and credibility of financial statements.

REPORTING RESPONSIBILITY

The main dutiei and responsibilities of the auditors in respect of the report are:

1 To protect and safeguard the rights of the shareholders against the misuse of directors' powers in managing the assets of the company;

2 To conduct sufficient examination of accounts so as to ensure that the transactions are legal and regular, with a view to informing the shareholders about the true financial position of the company; and

3 To disclose in their report any such activity of the management which may jeopardise the interest of the shareholders of the company who have contributed its capital.

Qualities  of a good  report

 A good report from the auditors should normally have the following qualities:

1Factual information

2 Effective presentation

3 Independent and unbiased approach

4 Honest identification of weaknesses in control

5 Positive outlook, balanced criticism and logical suggestions

6 Precise, brief and relevant

Four Different Types of Auditor Opinions

Auditors have the option of choosing among four different types of auditor opinion reports. An auditor opinion report is a letter that auditors attach to the statutory audit report that reflects their opinion of the audit. The four types of auditor opinions are:

Unqualified opinion-clean report

Qualified opinion-qualified report

Disclaimer of opinion-disclaimer report

Adverse opinion-adverse audit report

Unqualified Opinion – Clean Report

 An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. This is also the type of report that most companies expect to receive. An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any disclaimers about any clauses or the audit process. This type of report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes that the company’s operations are in good compliance with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be free from material misstatements.

Qualified Opinion-Qualified Report

When an auditor isn’t confident about any specific process or transaction that prevents them from issuing an unqualified, or clean, report, the auditor may choose to issue a qualified opinion. Investors don’t find qualified opinions acceptable, as they project a negative opinion about a company’s financial status. Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion.

A common for reason for auditors issuing a qualified opinion is that the company didn’t present its records with GAAP.

Disclaimer of Opinion-Disclaimer Report

When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements. Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for their questions. They may not have been able to decipher the correct nature of some transactions or to secure enough evidence to support good financial reporting. Auditors that aren’t allowed an opportunity to observe operational procedures or to review particular procedures may feel like they’re not able to express a definite opinion, so they feel a disclaimer is necessary and in order. The general consensus is that a disclaimer of opinion constitutes a very harsh stance. As a result, it creates an adverse image of the company.

Adverse Opinion-Adverse Audit Report

The final type of audit opinion is an adverse opinion. Auditors who aren’t at all satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which investors and the government will mistrust the company’s financial reports.

An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports contain gross misstatements and have the potential for fraud. Adverse opinions send out a high alert that the company’s records haven’t been prepared according to GAAP. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company.

Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Auditor opinions place pressure on companies to change their financial reporting processes and incorporate practices like ESG and cybersecurity healthcare governance so that they’re clear and accurate. Companies, investors and the public highly value unqualified reports.

Contents of an Audit Report

Heading	Brief of contents
Title	Title should mention that it is an ‘Independent Auditor’s Report’.
Addressee	Should mention clearly as to whom the report is being given to. For example Members oMentions that it is the Management’s responsibility to Prepare the Financial Statements. f the company, Board of Directors
Management’s Responsibility for Financial Statements
Auditor’s Responsibility	Mention that responsibility of the Auditor is to express an unbiased opinion on the financial statements and issue an audit report.
Opinion	Should mention the overall impression obtained from the audit of financial statements. For example Modified Opinion, Unmodified Opinion
Basis of the Opinion	State the basis on which the opinion as reported has been achieved. Facts of the basis should be mentioned.
Other Reporting Responsibility	If any other reporting responsibility exists, the same should be mentioned. For example Report on Legal or Regulatory requirements
Signature of the Auditor	The engagement partner (auditor) shall sign the audit report.
Place of Signature	The city in which audit report is signed.
Date of Audit Report	Date on which the audit report is signed.

Emphasis of Matter paragraph in an Audit Report

In a situation where the auditor concludes that it is important to draw the attention of users of the financial statement to a particular reported item, he/she may include an Emphasis of Matter paragraph in his / her audit report. In this case, the auditor is not required to modify his / her opinion. The paragraph is added when the issue is not a key audit matter and only requires disclosure for a better understanding of the financial statements.