By Himanshu V. Kishnadwala
Chartered Accountant
ILLUSTRATION OF STATUTORY AUDIT REPORT AS
PER SA 700 (REVISED) AND SA 701
Compiler’s Note
SA 700 (revised) ‘Forming an Opinion and Reporting
on Financial Statements’ and SA 701 ‘Communicating Key Audit Matters in the
Independent Auditor’s Report’ (applicable only to audits of listed entities)
which are effective for audits of financial statements for periods beginning on
or after 1st April, 2018. The format of the report has undergone
several changes and due care should be taken before issuing audit reports for
the year ended 31st March, 2019.
Given below is an illustration of one of the first
audit reports issued for the year ended 31st March, 2019.
INFOSYS LTD (31ST MARCH, 2019)
Report on Audit of Standalone Financial
Statements
Opinion
We have audited the accompanying standalone
financial statements of Infosys Limited (“the Company”), which comprise the
Balance Sheet as at 31st March, 2019, the Statement of Profit and
Loss (including Other Comprehensive Income), the Statement of Changes in Equity
and the Statement of Cash Flows for the year ended on that date, and a summary
of the significant accounting policies and other explanatory information
(hereinafter referred to as “the standalone financial statements”).
In our opinion and to the best of our
information and according to the explanations given to us, the aforesaid
standalone financial statements give the information required by the Companies
Act, 2013 (“the Act”) in the manner so required and give a true and fair view
in conformity with the Indian Accounting Standards prescribed u/s. 133 of the
Act read with the Companies (Indian Accounting Standards) Rules, 2015 as
amended (“Ind AS”) and other accounting principles generally accepted in India,
of the state of affairs of the company as at 31st March, 2019, the
profit and total comprehensive income, changes in equity and its cash flows for
the year ended on that date.
Basis for Opinion
We conducted our
audit of the standalone financial statements in accordance with the Standards
on Auditing specified u/s. 143(10) of the Act (SAs). Our responsibilities under
those Standards are further described in the Auditor’s Responsibilities for the
Audit of the Standalone Financial Statements section of our report. We are
independent of the company in accordance with the Code of Ethics issued by the
Institute of Chartered Accountants of India (ICAI) together with the
independence requirements that are relevant to our audit of the standalone
financial statements under the provisions of the Act and the Rules made
thereunder, and we have fulfilled our other ethical responsibilities in
accordance with these requirements and the ICAI’s Code of Ethics. We believe
that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion on the standalone financial statements.
Key Audit Matters
Key audit
matters are those matters that, in our professional judgement, were of most
significance in our audit of the standalone financial statements of the current
period. These matters were addressed in the context of our audit of the
standalone financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters. We have determined
the matters described below to be the key audit matters to be communicated in
our report.
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Sr. No.
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Key Audit Matter
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Auditor’s Response
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1
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Accuracy of recognition, measurement,
presentation and disclosures of revenues and other related balances in view
of adoption of Ind AS 115 “Revenue from Contracts with Customers” (new
revenue accounting standard)
The application of the new revenue accounting standard involves
certain key judgements relating to identification of distinct performance
obligations, determination of transaction price of the identified performance
obligations, the appropriateness of the basis used to measure revenue
recognised over a period. Additionally, the new revenue accounting standard
contains disclosures which involve collation of information in respect of
disaggregated revenue and periods over which the remaining performance
obligations will be satisfied subsequent to the balance sheet date.
Refer Notes 1.4a and 2.16 to the Standalone Financial
Statements.
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Principal Audit Procedures
We
assessed the company’s process to identify the impact of adoption of the new
revenue accounting standard.
Our
audit approach consisted of testing of the design and operating effectiveness
of the internal controls and substantive testing as follows:
• Evaluated
the design of internal controls relating to implementation of the new revenue
accounting standard.
• Selected a sample of continuing and new contracts, and tested
the operating effectiveness of the internal control, relating to
identification of the distinct performance obligations and determination of
transaction price. We carried out a combination of procedures involving
inquiry and observation, re-performance and inspection of evidence in respect
of operation of these controls.
• Tested the relevant information technology systems’ access and
change management controls relating to contracts and related information used
in recording and disclosing revenue in accordance with the new revenue
accounting standard.
• Selected a sample of continuing and new contracts and performed
the following procedures:
• Read, analysed and identified the distinct
performance obligations in these contracts.
• Compared these performance obligations with
that identified and recorded by the company.
• Considered the terms of the contracts to
determine the transaction price including any variable consideration to
verify the transaction price used to compute revenue and to test the basis of
estimation of the variable consideration.
• Samples in respect of revenue recorded for time
and material contracts were tested using a combination of approved time
sheets including customer acceptances, subsequent invoicing and historical
trend of collections and disputes.
• In respect of samples relating to fixed price
contracts, progress towards satisfaction of performance obligation used to
compute recorded revenue was verified with actual and estimated efforts from
the time recording and budgeting systems. We also tested the access and
change management controls relating to these systems.
• Sample of revenues disaggregated by type and
service offerings was tested with the performance obligations specified in
the underlying contracts.
• Performed analytical procedures for
reasonableness of revenues disclosed by type and service offerings.
• We reviewed the collation of information and
the logic of the report generated from the budgeting system used to prepare
the disclosure relating to the periods over which the remaining performance
obligations will be satisfied subsequent to the balance sheet date.
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2.
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Accuracy of revenues and onerous obligations in
respect of fixed price contracts involves critical estimates
Estimated effort is a critical estimate to determine revenues
and liability for onerous obligations. This estimate has a high inherent
uncertainty as it requires consideration of progress of the contract, efforts
incurred till date and efforts required to complete the remaining contract
performance obligations.
Refer
Notes 1.4a and 2.16 to the Standalone Financial Statements.
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Principal Audit Procedures
Our audit approach was a combination of test of internal
controls and substantive procedures which included the following:
• Evaluated the design of
internal controls relating to recording of efforts incurred and estimation of
efforts required to complete the performance obligations.
• Tested the access and
application controls pertaining to time recording, allocation and budgeting
systems which prevents unauthorised changes to recording of efforts incurred.
• Selected a sample of
contracts and through inspection of evidence of performance of these
controls, tested the operating effectiveness of the internal controls
relating to efforts incurred and estimated.
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• Selected a sample of
contracts and performed a retrospective review of efforts incurred with
estimated efforts to identify significant variations and verify whether those
variations have been considered in estimating the remaining efforts to
complete the contract.
• Reviewed a sample of
contracts with unbilled revenues to identify possible delays in achieving
milestones, which require change in estimated efforts to complete the
remaining performance obligations.
• Performed analytical
procedures and test of details for reasonableness of incurred and estimated
efforts.
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3.
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Evaluation
of uncertain tax positions
The company has material uncertain tax positions including
matters under dispute which involves significant judgement to determine the
possible outcome of these disputes.
Refer
Notes 1.4b and 2.22 to the Standalone Financial Statements.
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Principal
Audit Procedures
Obtained details of completed tax assessments and demands for
the year ended 31st March, 2019 from management. We involved our
internal experts to challenge the management’s underlying assumptions in
estimating the tax provision and the possible outcome of the disputes. Our
internal experts also considered legal precedence and other rulings in
evaluating management’s position on these uncertain tax positions.
Additionally, we considered the effect of new information in respect of
uncertain tax positions as at 1st April, 2018 to evaluate whether
any change was required to management’s position on these uncertainties.
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4.
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Recoverability
of indirect tax receivables
As at 31st March, 2019 non-current assets in respect
of withholding tax and others includes CENVAT recoverable amounting to Rs.
503 crore which are pending adjudication.
Refer
Note 2.8 to the Standalone Financial Statements.
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Principal
Audit Procedures
We
have involved our internal experts to review the nature of the amounts
recoverable, the sustainability and the likelihood of recoverability upon
final resolution.
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Information Other than the Standalone
Financial Statements and Auditor’s Report Thereon
The company’s Board of Directors is
responsible for the preparation of the other information. The other information
comprises the information included in the Management Discussion and Analysis,
Board’s Report including Annexures to Board’s Report, Business Responsibility
Report, Corporate Governance and Shareholder’s Information, but does not
include the standalone financial statements and our auditor’s report thereon.
Our opinion on the standalone financial
statements does not cover the other information and we do not express any form
of assurance / conclusion thereon.
In connection with our audit of the
standalone financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially
inconsistent with the standalone financial statements or our knowledge obtained
during the course of our audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report in this regard.
Management’s Responsibility for the
Standalone Financial Statements
The company’s Board of Directors is
responsible for the matters stated in section 134(5) of the Act with respect to
the preparation of these standalone financial statements that give a true and
fair view of the financial position, financial performance, total comprehensive
income, changes in equity and cash flows of the company in accordance with the
Ind AS and other accounting principles generally accepted in India. This
responsibility also includes maintenance of adequate accounting records in
accordance with the provisions of the Act for safeguarding the assets of the
company and for preventing and detecting frauds and other irregularities;
selection and application of appropriate accounting policies; making judgements
and estimates that are reasonable and prudent; and design, implementation and
maintenance of adequate internal financial controls, that were operating
effectively for ensuring the accuracy and completeness of the accounting
records, relevant to the preparation and presentation of the standalone financial
statements that give a true and fair view and are free from material
misstatement, whether due to fraud or error.
In preparing the standalone financial
statements, management is responsible for assessing the company’s ability to
continue as a going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting unless management
either intends to liquidate the company or to cease operations, or has no
realistic alternative but to do so.
The Board of Directors are responsible for
overseeing the company’s financial reporting process.
Auditor’s Responsibilities for the Audit
of the Standalone Financial Statements
Our objectives
are to obtain reasonable assurance about whether the standalone financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with SAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these standalone financial statements.
As part of an audit in accordance with SAs,
we exercise professional judgement and maintain professional scepticism
throughout the audit. We also:
- Identify and assess the
risks of material misstatement of the standalone financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
- Obtain an understanding of
internal financial controls relevant to the audit in order to design audit
procedures that are appropriate in the circumstances. U/s. 143(3)(i) of the
Act, we are also responsible for expressing our opinion on whether the company
has adequate internal financial controls system in place and the operating
effectiveness of such controls.
- Evaluate the appropriateness
of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
- Conclude on the
appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the
company’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the standalone financial statements or, if
such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the company to cease to continue
as a going concern.
- Evaluate the overall
presentation, structure and content of the standalone financial statements,
including the disclosures, and whether the standalone financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
Materiality is the magnitude of
misstatements in the standalone financial statements that, individually or in
aggregate, makes it probable that the economic decisions of a reasonably
knowledgeable user of the financial statements may be influenced. We consider
quantitative materiality and qualitative factors in (i) planning the scope of
our audit work and in evaluating the results of our work; and (ii) to evaluate
the effect of any identified misstatements in the financial statements.
We communicate with those charged with
governance regarding, among other matters, the planned scope and timing of the
audit and significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide those charged with
governance with a statement that we have complied with relevant ethical
requirements regarding independence and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence and, where applicable, related safeguards.
From the matters communicated with those
charged with governance, we determine those matters that are of most
significance in the audit of the standalone financial statements of the current
period and are therefore the key audit matters. We describe these matters in
our auditor’s report unless law or regulation precludes public disclosure about
the matter or when, in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse consequences of doing
so would reasonably be expected to outweigh the public interest benefits of
such communication.
Report on Other Legal and Regulatory
Requirements
1. As required by section 143(3) of the Act,
based on our audit we report that:
a) We have sought and obtained all the
information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit.
b) In our opinion, proper books of account
as required by law have been kept by the company so far as it appears from our
examination of those books.
c) The Balance Sheet, the Statement of
Profit and Loss including Other Comprehensive Income, Statement of Changes in
Equity and the Statement of Cash Flow dealt with by this Report are in
agreement with the relevant books of account.
d) In our opinion, the aforesaid standalone
financial statements comply with the Ind AS specified u/s. 133 of the Act, read
with Rule 7 of the Companies (Accounts) Rules, 2014.
e) On the basis of the written
representations received from the directors as on 31st March, 2019
taken on record by the Board of Directors, none of the directors is
disqualified as on 31st March, 2019 from being appointed as a
director in terms of section 164 (2) of the Act.
f) With respect to the adequacy of the
internal financial controls over financial reporting of the company and the
operating effectiveness of such controls, refer to our separate report in
“Annexure A”. Our report expresses an unmodified opinion on the adequacy and
operating effectiveness of the company’s internal financial controls over
financial reporting.
g) With respect
to the other matters to be included in the Auditor’s Report in accordance with
the requirements of section 197(16) of the Act, as amended: In our opinion and
to the best of our information and according to the explanations given to us,
the remuneration paid by the company to its directors during the year is in
accordance with the provisions of section 197 of the Act.
h) With respect
to the other matters to be included in the Auditor’s Report in accordance with
Rule 11 of the Companies (Audit and Auditors) Rules, 2014 as amended, in our
opinion and to the best of our information and according to the explanations
given to us:
i. The company
has disclosed the impact of pending litigations on its financial position in
its standalone financial statements.
ii. The company
has made provision, as required under the applicable law of accounting
standards, for material foreseeable losses, if any, on long-term contracts
including derivative contracts.
iii. There has
been no delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the company.
2. As required by the Companies (Auditor’s
Report) Order, 2016 (“the Order”) issued by the Central government in terms of
section 143(11) of the Act, we give in “Annexure B” a statement on the matters
specified in paragraphs 3 and 4 of the Order.
