Ind AS/IFRS for Auditors


Objective of Financial Reporting

The Objective of Financial Reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.

  • Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases.
  • Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect.

Investors’, lenders’ and other creditors’ expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity.

To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about:

  • the resources of the entity
  • claims against the entity and
  • how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources
  • eg protecting the entity's resources from unfavourable effects of economic factors such as price and technological changes

Financial reports provide information about the reporting entity’s economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims.

Preparation and Presentation of Financial Statements

The financial statements subject to audit are those of the entity, prepared by management of the entity with oversight from those charged with governance.
Management of an entity is responsible for the preparation and presentation of the financial statements in accordance with IFRS.

Complete set of financial statements

A complete set of financial statements comprises:

  • a statement of financial position as at the end of the period
  • a statement of profit or loss and other comprehensive income for the period
  • a statement of changes in equity for the period
  • a statement of cash flows for the period
  • notes, comprising significant accounting policies and other explanatory information
Fair Presentation

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity.

Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework

Statement of compliance with IFRS

Management of an entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. They shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs.

Inappropriate accounting policies cannot be rectified either by disclosure of the accounting policies used or by notes or explanatory material

In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial reporting set out in the Framework, the entity shall depart from that requirement in the manner set out below if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.

Departure from requirements of IFRS

When an entity departs from a requirement of an IFRS and the relevant regulatory framework requires, or otherwise does not prohibit, such a departure, it shall disclose:

  • that management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows
  • that it has complied with applicable IFRSs, except that it has departed from a particular requirement to achieve a fair presentation
  • the title of the IFRS from which the entity has departed, the nature of the departure, including the treatment that the IFRS would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial reporting set out in the Framework, and the treatment adopted and
  • for each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement.

In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial reporting set out in the Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:

  • the title of the IFRS in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial reporting set out in the Framework and
  • for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation
Audit of Financial Statements

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with IFRS.

In conducting an audit of IFRS financial statements, the overall objectives of the auditor are:

  • To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with IFRS
  • To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings.
Reasonable Assurance

Reasonable assurance is a high but not absolute level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level.

Forming an Opinion on Financial Statements

Chartered Accountants in India

The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
The auditor shall modify the opinion in the auditor’s report if the auditor:

  • concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement or
  • is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement
Nature of the matter giving rise to modification Auditor’s judgment about the pervasiveness of the effects or possible effects on the Financial Statements
Material but not pervasive Material and pervasive
Financial statements are materially misstated Qualified Opinion Adverse opinion
Inability to obtain sufficient appropriate audit evidence Qualified Opinion Disclaimer of opinion

Financial Statements Are Materially Misstated

Based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement. This would include uncorrected misstatements that are material, the appropriateness or application of accounting principles, and the failure to disclose information that results in a material misstatement

Qualified Opinion

When the effect is not material and pervasive enough to require an adverse or disclaimer of opinion. This applies where:

  • Sufficient appropriate audit evidence was obtained, but the auditor concludes that misstatements exist, individually or in the aggregate, that are material but not pervasive to the financial statements; or
  • The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion. The auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
Adverse Opinion

When the effects of misstatements are both material and pervasive. This applies where sufficient appropriate audit evidence was obtained, but the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Inability to Obtain Sufficient Appropriate Audit Evidence

Unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. This could include:

  • Circumstances beyond the control of the entity, such as a fire that damaged accounting records;
  • Circumstances relating to the nature or timing of the auditor’s work, such as an inability to attend an inventory count or
  • Limitations imposed by management, such as management not allowing the auditor to obtain an external confirmation of certain receivables
Disclaimer of Opinion

When the possible effect of undetected misstatements, if any, could be both material and pervasive. This applies where the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and concludes that the possible effects of undetected misstatements, if any, could be both material and pervasive.
This also applies to extremely rare circumstances where it is not possible to form an opinion due to the potential interaction of multiple uncertainties and their possible cumulative effect on the financial statements. This applies even where the auditor has obtained sufficient audit evidence regarding each of the individual uncertainties.

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