- accounting standards? means the standards of accounting or any addendum thereto for companies or class of companies referred to in section 133;

 ?auditing standards? means the standards of auditing or any addendum thereto for companies or class of companies referred to in sub-section (10) of section 143; 

?book and paper? and ?book or paper? include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form;

?books of account? includes records maintained in respect of—

(i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

(ii) all sales and purchases of goods and services by the company;

(iii) the assets and liabilities of the company; and

(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

The Basics:

Audits of company accounts have been compulsory in India since the passing of the first Companies Act in 1913. Since then, the Institute of Chartered Accountants of India (ICAI), a statutory body established under the Chartered Accountants Act, 1949, has regulated the profession of chartered accountants in India and ensured the maintenance of India’s accounting standards. All chartered accountants are members of the ICAI, and must comply with the standards stipulated by the ICAI and the Audit and Assurance Standards Board (AASB).

Essentially, an audit is the inspection of an individual, business or organization’s accounts, and is traditionally completed by an independent individual or firm with specialized skills and knowledge of auditing procedures in the country in question. In other words, accountants verify that a company’s business transactions were recorded accurately, and provide a true and fair reflection of that company’s financial situation.

The importance of the audit process cannot be understated, as the results can be used for the following purposes:

• Helping investors know the financial health of the company
• Assuring the government that the company is properly discharging its legal duties
• Helping lenders evaluate the credibility of the company
• Drawing management’s attention to any shortcomings in the company’s business operations
• Helping management improve business efficiency

Auditing Objectives

As mentioned earlier, there are two key objectives associated with annual audit in India: expressing to shareholders and the Indian government a true and fair view of the company’s financial statements, and detecting and preventing instances of fraud and error.

Ensuring a company’s balance sheet provides a true and fair reflection of its current state of affairs requires an auditor who, after completing the audit process, will express their opinion of the company’s financial statements via an auditor’s report. These financial statements should include:

• Balance Sheet
• Profit & Loss Account
• Cash Flow Statement
• Notes to Accounts

A “true and fair view” can only be satisfied if the financial statements are accurate and not misleading. A company can expect the auditor to feel they have provided a true and fair assessment if the following criteria are satisfied:

• The accounts are prepared with reference to the entries in the account books
• Entries are supported by proper vouchers, documents, or other evidence
• No entry in the account book is omitted while preparing the financial statements, and nothing is included in the financial statements that were not in the account books
• The financial statements are prepared in accordance with the relevant accounting standards

An incidental objective associated with annual audit in India is the detection of errors or fraud in a company’s financial statements. If an irregularity is detected, the auditor has a duty to report the details to management, who is then expected to remedy such an error.

Types of Audits

Basic audits in India are generally classified into two main types:

• Statutory Audits
• Internal Audits

Statutory audits are conducted to report the current state of a company’s finances and accounts to the Indian government and shareholders. Such audits are performed by qualified auditors working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government agency.

Internal audits are conducted at the behest of internal management in order to check the health of a company’s finances, and analyze the organization’s operational efficiency. Internal audits may be performed by an independent party or by the company’s own internal staff.

In India, every company whose shares are registered on the stock exchange must have an internal auditing system in place. A company whose shares are not listed on the stock exchange, but whose average turnover during the previous three years exceeds INR50 million, or whose share capital and reserves at the beginning of the financial year exceeds INR5 million, must also have an internal auditing system in place. The statutory auditor of the company must additionally report on the company’s internal auditing system of the company in the final report.

Statutory Audits

In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:

• Tax Audits
• Company Audits

Audit Reporting

As discussed earlier, audits are conducted to ensure a company’s financial statements present a true and fair view of its financial affairs. Therefore, the auditor’s opinion expressed in the ultimate report is based on the information gathered during the audit and the verification of financial statements. Upon completing the report, the auditor may express one of the following four opinions:

• Unqualified Opinion
• Qualified Opinion
• Disclaimer of Opinion
• Adverse Opinion

Unqualified Opinion

An unqualified opinion is expressed 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. It confirms that:

• Generally accepted accounting principles are consistently applied in the preparation of financial statements
• Financial statements comply with the relevant statutory requirements and regulations
• There is adequate disclosure of all material matters relevant to the proper presentation of financial information (subject to statutory requirements)

Qualified Opinion

A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed, but that the effect of any disagreement with management is not so material and 

pervasive as to require an adverse opinion, or the limitation of scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being “subject to’” or “except for” the effects of the matter to which the qualification relates.

Disclaimer of Opinion

A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient and appropriate audit evidence and is, therefore, unable to express an opinion on the financial statements.

Adverse Opinion

An adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to indicate the misleading or incomplete nature of the financial statements.