Following the NSEL crisis, the auditor of FTIL (NSEL’s holding firm) withdrew its audit saying FTIL’s standalone and consolidated financial statements were no longer reliable.
Financial statements are the board of directors’ responsibility. These are generally prepared by the management, reviewed by the audit committee before being sent for approval by the board of directors and the auditor.
ICAI has, inter alia, issued Accounting Standards (AS) and Standards on Auditing (SA). The Companies Act, 2013 requires compliance with both AS and SA.
AS-13 (Accounting for Investments) deals with the accounting and reporting requirements of the investment in the subsidiary by the holding company. It requires ‘other than temporary’ (but not permanent) decline in the carrying amount of these investments to be recognised on individual basis. The auditor examines the latest financial statements of the subsidiary before opining on the value of these investments. It may ask for valuation by an expert. Here, it applies SA 620, or Using the Work of an Auditor’s Expert.
But where investment is in a subsidiary, the auditor needs to tread with more professional scepticism. It has to check for compliance with SA-550 (Related Parties) that expands on how SA-315 (Identifying and Assessing the Risks of Material Misstatements Through Understanding the Entity and its Environment), SA-330 (The Auditor’s Responses to Assessed Risks), and SA-240 (The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements) are applied in relation to risks of material misstatements associated with related-party relationships.
Not recognising, measuring and reporting ‘other than temporary’ diminution may make financial statements materially misstated (diminutions impact the ‘going concern’ of the holding company). This will necessitate the application of SA-570 (Going Concern), requiring the auditor to modify its audit opinion in terms of SA-705 (Modifications to the Opinion in the Independent Auditor Report). Where financial statements are materially misstated, the auditor qualifies its opinion if the effect or possible effect on the financial statements is material but not pervasive. But where the effects are material and pervasive, it gives an adverse opinion.
Section 227(3)(a) of the Companies Act, 1956, requires the auditor to state “whether it has obtained all the information and explanations which to the best of its knowledge and belief were necessary for the purpose of audit”. Section 143(3)(a) of the Companies Act, 2013, requires the auditor to state “whether it has sought and obtained all the information and explanations which to the best of