MODULE

AUDITREPORT AND
PROFESSIONAL ETHICS

LEARNING OBJECTIVES

To understand the audit report and its types.

To know the role of Independent auditors.

To know the professional ethics and
To know the code of professionals ethics
 Practice of Auditing
Principles and

Evolution ofAudit Report significantly shaped by the

The practise of
auditing in India
during
British.
the colonial era was standard
Audit reports lacked
accounting
methods and were often
adheres to introduced
by the independence in 1947, a pressing need emerged for the
India's attainment of establishment of the
informal. Following auditing standards and norms. The Institute
of
establishment andformulation (ICAI)in 1949 was instrumental in the standardisation of auditing
Accountants of India
of Chartered
inclusion of views about
practises.
regulated by the firms Act, 1956. The the
audit of firms in India was requirements became a comme
The compliance with regulatory
fairness of financial statements and of Accounting Standards (AS) by
the ICAI was initiated
issuance
practise in audit reports. The standard and consistent framework for financial reporting
with the objective of establishinga these criteria necessitated the compliance of audit renorts
auditing procedures. The adherence to
globalisation has prompted a concerted effort to harmonise accounting and
The phenomenon of worldwide community. The Institute of Charterod
auditing standards in India with those of the
aligning Indian Accounting Standards (Ind AS)
|Accountantsof India (1CAI) initiated the process of
(IFRS).
with International Financial Reporting Standards
the Companies (Audit
Significant modifications to audit reports were made in India in 2017 by
auditor independence.
and Auditors) Amendment Rules. Opinions on key audit matters (KAMS),
accordance with
and the auditor's duty to prevent fraud have to be included in auditor reports. In
concerns about corporate governance and financial reporting,the focus on audit quality and auditor
independence has intensified. Regulatory organisations have put in place procedures to improve
the independence and quality of audits.
5.1 AuDIT REPORT
An audit report is a formal document that is generated by an auditor or an audit firm subsequent
to completing an investigation of a company's financial statements, records, internal controls, or
any other pertinent information. The primary goal of an audit report is to provide an imparua
and unbiased evaluation of the precision of financial statements and their adherence to
accountng
principles and regulatory requirements. Audit reports are often generated for a range of audit y p
including financial audits, internal audits, and compliance audits.
5.2 SIGNIFICANT ELEMENTS OR
COMPONENTS
That may be discovered in an audit report
1. Title: The report's title
often states that it isan audit report.
2. Addressee: A report's
addressee is the organisation that hired the auditor, often the
management team, board of directors,or shareholders of the firm.
3. Introductory
Paragraph: This section provides
and roles for the auditor and management. an overview
Additionally, of the the
it details audit's
parameters,
goals, period,the
reporting
financial statements that were audited, and any
4.
Management's Responsibility: "The report pertinent normally
auditing standard reference describing
management's accountability for creating and maintaining contains
internal controls as wellasfor
a section
generating the financial statements.
 Audit Report and Professiongl
Auditor''s Ethics<5.3
5. Responsibility: The duties of the auditor are describedin this part. These
include carrying out the audit in duties
adequate and pertinent accordance with the relevant auditing
caudit evidence, and providing an standards,
opinion on the financial gathering
6. Scope Paragraph:
The.auditor
explains the audit's scope, including the steps used,statements.
the areas
Jsakedat, and any constraints or limits that could have had an
impact on the audit.
7. Opinion: The audit report's opinion, which is often the main justification for its issue, is
essential component of the document. Whether the financial statements are
tmuthfully inall significant aspects in conformity with the relevant financial reportingpresented
is the auditor's assessiment. Unqualified (clean) views, qualified structure
opinions, unfavourable
Rninions. anddisclaimers of opinion are examples of common categories of opinions.
8. Basis for Opinion: The auditor explains the reasons for their opinion in this section. They
could make reference to particular audit techniques, the data gathered, and any key audit
concerns or results.

9. Additional Reporting Duties: The auditor may insert extra information, such as an emphasis
oftopic paragraph, relating to major issues that need attention but do not impact the conclusion
if required to do so by auditing standards or laws.
10. Date and Signature: The auditor or audit firm signs the audit report to attest to their ownership
denotes
of the report'scontent. Additionally, the date of the report is included, which normally
when the audit process was finished.
the auditor's location and method of contact.
11. Address of the Auditor: The report can include
the opinion denotes the time at which the
12. Date of the Auditor's Opinion: The date stated in work.
audit
auditor came to their conclusion based on the

5.3 TYPES OF AUDIT REPORT

obtain four distinct audit report categories. Auditors use the same procedures to
A business can examination. These reports inform businesses
type based on the results of their
ascertain theaudit Each of these four audit reports,
standing of a company's finances.
and investors of the reliability and distinct audit findings, dependent on whether or not the
format, displays
despite having a similar
company employs accepted financial practices.
The four audit report types are:

Types ofAudit Report

Qualified Report
Clean Report

Adverse Opinion Report

Disclaimer Report
 Principles and Practice of Auditing
communicates an auditor's "unqualified opinion," which
1. Clean Report: Aclean report
records of a company. The ter
theauditor found no problems with the financial means
indicates that the company does not need to satisfy any additional
standing. A company obtains a clear report when it
criteria to
demonstrates "Unquafilnifanciied"al
better its
compliance with GAAP
standards.
This is the most popular and prominent form of audit report. In the report

laws and accounting principles. Before theyinvest in a business, a majority of

document
auditor states that the company has a solid financial position and complies with , an
applicable
to see a clear audit report. investors want
Example
Awell-established Indian manufacturing company,,ABC Ltd., has a history of
maintaining
financial records and strict compliance with Generally Accepted Accounting Principles meticulous
acomprehensive audit, the auditor expresses an unqualified opinion, stating that ABC (GAAP). After
Ltd's
statements fairly represent its financial position and are in accordance with GAAP. This financial
indicates that investors and stakeholders can have confidence in the clean report
accuracyof the company'
financial statements.
s
2. Qualified Report: Aqualified report conveys the
financial health of a company. This demonstratesqualified opinion ofan auditor regarding the
that acompany has not followed all GAAP
standards but is not engaging in unlawful or misleading financial
means that a company must satisfy certain practices. Aqualified report
by auditors. qualifications to have a financial status authorised
Auditors may issue this report if they are uncertain
practices. In the written qualified report, an auditorabout particular business transactions or
must address in order to comply with specifies which qualifications a business
GAAP.
teams in determining which areas of their Qualified reports assist financial management
their financial standing. organisation must be improved in order to improve
C Example
XYZ Corp., an Indian
technology startup, is known for its innovative
revenue recognition process that the auditor finds products but has a complex
a qualified report, challenging to verify. The auditor,
while the financial specifying the concerns related to the revenue therefore, 1ssues
statements
issues to fully comply with are recognition process.
generally accurate, the company needs to addressThey State
GAAP. This these specific
of XYZ Corp.'s report serves as a warning to
accounting practices need stakeholders that certain aspects
3.
Disclaimer Report: Auditors issue improvement.
opinion regarding acompany's disclaimer reports when they are unable to express an
believe the company financials. Typically, when an auditor issues this report,they
a company fails prevented
to provide them from making
adequate occurif
records contain an error. Ifadequate responses to an observations. This may
or if their financial
this 0ccurs, an auditor may s enquiries
auditor'
determination regarding a
company' s feel unable to make a definitive
A
disclaimer report allows themto finances.
auditor and extricate themselves maintain their reputation as an professional
from company if
a impartial and
necessary.
 Audit Report and
Example
Professional Ethies <5.5
An auditor is engaged to review the financial
statements
Eats. However, the restaurant owner refuses to provide key
of a
family-0wned Indian restaurant, ABC
certain expenses, making it impossibleefor the auditor
to documentation
complete a
and explanations about
the auditor issues a disclaimer report, explaining that due to
the
thorough examination. Inthis case,
.ko cannot express an opinion on hBG Eats lack of cooperation information,
and
nnancial Statements. This report conveys the auditor's
inabilityto verify the accuracy of the financial data due to the lack of
access.
Adverse Opinion Report: An adverse or negative opinion report frequently
.thin an organisation. Auditors issue adverse opinion emphasises fraud
Einancial statement irregularities or reports when they discover instances
disregarded GAAP standards.
misrepresentations. These businesses have frequently
Anegative opinion report alerts finance protessionals and the general public to a
company's
notentially unethical practices. These reports also enable the company to resolve and enhance
itsperformance.
Example
An auditor investigating a publicly traded Indian pharmaceutical company, MedPharma Lrd., discovers
evidence of fraudulent practices related to revenue recognition, inventory valuation, and undisclosed
related-party transactions. The auditor issues an adverse opinion report, highlighting the financial
irregularities and misrepresentations found. This report raises a red flag for investors and regulators,
indicating that MedPharma Ltd.'s financial statements are not a reliable representation of the
company's financial health and that they have not adhered to GAAP standards. This report can lead to
legal and regulatory actions against the company for the alleged misconduct.

5.4 INDEPENDENT AUDITOR'S REPORT

internal auditor
M ndependent Auditor's Report is a formal evaluation provided by an external or
compiled by a company.
auout the integrity and precision of the financial statements that have beenauditor and the intended
communication between the
eportserves as a fundamental means of
stock holders, lenders, creditors,and
pients of financial statements. The user base comprises of
Other prospective investors in the organisation.
document in the realm of financial reporting. It is
A.Pendent Auditor's Report is a crucial
confidence to stakeholders that the financial statements they rely on for decision
Mlo provide in maintainingthe transparency and
pivotal role
making are credible and accurate. The report plays a
informed and efficient capital allocation.
integrityoffinancial markets, which ultimately supports
:
The Key Components of an Independent Auditor's Report are
Auditor's Report is prepared byan independentauditor,
1. Formal The independently
Evaluation by an Auditor: cases, an internal auditor who operates
who is an external party o, in some assess the financialstatements to
determmine
Thisauditor's role is to
* n the organization company's financial
position.
the
whether they present a true and fair view of primnary objective of the
auditor's
Statements: The
2. precision.
and Precision of Financial statements are prepared I with integrity andmisleading.
Integrity
evaluation is to ensure that thefinancial statementsis accurate, complete, and not
This means that the information in the
 Principles and Practice of Avditing
The auditor reviews the accounting practices, internal controls, and financial transactions to
verify the correctness of the data.
3. Communication with Stakeholders: The Auditor's Report serves as a formnal means of
communication between the auditor and various stakeholders, including
shareholders,
lenders, creditors, and potential investors. It provides these parties with an independent and
expert assessment of the financial statements.
4. User Base: The user base for the Auditor's Report is diverse and includes:
Stockholders/Shareholders: Investors who own shares in the company rely on the
report tomake informed decisions about their investments. The report helpsthem assese
the financial health of the company.
" Lenders: Banks and financial institutions providing loans to the company use the report
toassess the company's ability to meet its debt obligations.
Creditors: Suppliers or trade creditors use the report to evaluate the company's
creditworthiness and the likelihoodofreceiving payment for goods and services provided.
Prospective Investors: Individuals or entities considering investing in the company use
the report to gauge the reliability of the company's financial information before making
an investment decision.
5. Types of Auditor's Reports: Auditor's
Reports can take various forms, including:
Unqualified Report (Clean Report): The auditor expresses an
indicating that the financial statements are presented fairly and areunqualified
in
opinion,
relevant accounting standards. This is the most compliance with
favorable report.
Qualified Report: The auditor issues a qualified opinion when
or uncertainties in the there are specific issues
financial statements, which are detailed in the
Disclaimer Report: If the auditor cannot express an opinion due to a report.
or restrictionsplaced by the lack of informaton
company, a disclaimer report is issued.
Adverse Report: An adverse opinion is given when the
auditor finds significant materlal
misstatements or irregularities in the financial statements.
report. This is the most unfavoraDie

[Auditor's Letterhead]
Independent Auditor's Report Template
Tothe
Shareholders (or Boardof Directors, as [Date)
We examined the appropriate) of [Company Name]
[Company Name<'s accompanying financial
balance sheet as of (Date), statements,
flows for the year just corresponding statements of income, changes in
comprisli
completed, as well
other supporting information. as a
description of key
equity, ana ca
policies and
accounting
Management'sResponsibility for the
In accordance with [Specify Financial Statements
applicable financial
Standards (Ind AS), US Generally Accepted reporting framework, e.g.,Indian Accounting
Accounting Principles (US GAAP),
 Audit Report and Professional Ethics<5.7
andInternational Financial Reporting Standards (1FRS)] management is responsible for the
preparationand fair presentation of these financial statements as well as for any
internal
controlthat management deems necessary to enable the preparation of financial statements
that are free from significant discrepancies.
Auditor's Responsibility
It is our duty to provide an assessment of these financial accounts based on our audit.
We carried out our audit in line with [Name the appropriate auditing standards, such as
Generally Accepted Auditing Standards (GAAS) or International Standards on Auditing
1SAS)], According to those principles, we must follow ethical guidelines, organise the audit,
and carry it out to get a reasonable levelof certainty that the financial statements are accurate
and without substantial errors in reporting,
Performing procedures during an audit entails gathering audit evidence on the sums and
disclosures in the financial statements. The auditor's judgement, including the evaluation
of the risks of substantial falsification of the financial statements, whether due to fraud or
mistake, willdetermine the techniques that are used. In order to design audit procedures
that are suitable in the circumstances, the auditor takes internal control into account when
making those risk assessments. However, this is not done with the intention of expressing an
opinion on the effectiveness of the entity's internal control. Along with assessing the overall
presentation ofthe financial statements, an audit also looks at the suitability of the accounting
rules followed and the accuracy ofthe accounting estimations made by management.
Opinion
The financial statements mentioned above, in our opinion, accurately reflect [Company
Namel's financial situation as of [Date], as well as its operating results and cash flows for the
year just ended in accordance with [Specify applicable financial reporting framework).
Emphasis of Matter
[Include this section if there is anything that needs special attention, such a change in
accounting rules, a big uncertainty, or a focus on something specific.]
|(Auditor's Signature with data)
[Name of Audit Firm]
(City, State, or Location]
[Date)
5.5 PROFESSIONAL ETHICS
personal
Professionally recognised norms of conduct, beliefs, and guiding principles in both
conduct
unu professional life are referred to as professional ethics. It includes the professional
GApectations at the individual, group, and corporate levels. Professionals and people practising
recognised professions use their specialised knowledge and abilities.
Oessional ethics is the studv of how this information ought to be used while offering a service to
wise
eral public. Professionals can assess circumstances, utilise their expertise, and come to
USTOnswhen the general population cannot because they lack the necessary training.
Human ethics
its members toinclude
professional ethics. Professional associations often create codes of conduct for
use as areference for carrying out their duties in accordance with morally sound and
Consistent standards.
 5.8> Principles and Practice of Auditing

5.6 CoODES OF PROFESSIONAL ETHICS

serves as the
The Institute of Chartered Accountants of India (1CAI) principal regulatory
responsible for overseeing auditing and accounting standards
in India. The
Institute
of body
AccountantChars, twhierecdh
India (1CAD has formulated the Code of Ethics for Chartered
Accountants of
delineates the ethical principles and standards that auditors are obligated to follow when
audit reports. The following are significant ethical factors that auditors in India must take into
while drafting audit reports:
generating
acCount
1. Independence and Objectivity: It is essential for auditors to preserve independence in
actuality and perception. It is imperative that auditors maintain both
independence by
from any financial, commercial, or personal affiliations with the client that
undermine their objectivity or impartiality during the audit process.
refraining
may potentially
2. Integrity: Itis essential for auditors to exhibit unwaveringhonesty in alltheir
professional and
Corporate interactions. It is important for individuals to exhibit) honesty and
discussions, refraining from directness
intentionally distorting or misrepresenting factual in their
3. information
Professional Competence and Due Care: Auditors are required to have the
abilities, competence, and understanding to carry out the audit requisite
individuals to demonstrate ahigh level of professional efficiently. It is important for
competence and
care and diligence are conscientiousness
while conducting an audit, so ensuring that due
throughout the whole process. used consistently
4. Professional Scepticism: Auditors are advised to have an
professional scepticism while doing an audit. It is inquisitive mentality and use
thorough evaluation of the acquired evidence, important for individuals to engage in a
they should be vigilant about the demonstrating a critical mind-set.
potential occurrence of fraudulent activities, Furthermore,
accepting information or explanations without sufficient proof. refraining from
5.
Confidentiality: All client data and audit
disclosure sensitive information should be results must be kept secret by auditors. Tne
of
a legal
requirement to do so. avoided unless there is explicit
6. authorisation ot
Compliance with Auditing Standards: Auditors in
relevant auditing standards, India are obligated to comply withthe
namely the
Chartered Accountants of India (1CAI). Standards on Auditing (SAs) set by the Institute of
pertaining to the execution of The
evaluation risks,
of audits, including aforementioned
many standards provide guidelines
7. collection of evidence, and the aspects such as the formulation of plans,
Reporting Objectivity: The audit results subsequent reporting of inatis
impartial and
by auditors to objective manner. Personal
should be prpresented in the audit report in an
8.
affect the report's
substance.prejudices or outside
influences cannot be allowed
Transparent
audit in Reporting:
of the a precise andThe audit report must to be findings
deficienciesor understandable
9. Unbiased important audit findings clearlymanner.
transparent
Auditors
and convey the
should any
substantial
Opinion: The financial and convey
judgement from the auditors. If statements
must be the
effectively.
they come into andobjective
subject of an impartial
circumstances that make it difficult for
theni
 Audit Report and
to provide an unqualified view, they should, if Professional Ethics
unfavourable opinion, or a disclaimer of necessary, declare a qualified opinion, an
Documentation: Auditors are opinion.
10. required to keep thorough records of their audits
their techniques, results, and conclusions. The audit that attest to
which also shows that professional care was process is recorded proper paperwork,
in
taken.
11. Ethical Dilemmas: While conducting the audit, auditors may run
Rrorcome such ethical problems, they should seek advice from the into moral quandaries. To
ICAI or the ethics committee
of their company.
42 Compliance with Legal and Regulatory
Requirements: All applicable laws and regulations
regulating the audit profession in India, including those pertaining to independence, reporting,
and professional conduct, must be followed by auditors.
K7 IFAC coDE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS
The International Federation of Accountants (IFAC) has established a comprehensive and globally
recognized Code of Ethics for Professional Accountants. This code provides ethical principles,
standards, and guidance for professional accountants, including auditors, accountants in public
practice, and accountants in business. The IFAC Code of Ethics is based on several fundamental
principles, including integrity, objectivity, professional competence and due care, confidentiality, and
professional behavior.
The accounting profession is distinguished by its recognition of the need to function in the utmost
interest of the public. In order to effectively serve the public's best interests, it is essential for a
professional accountant to adhere to and comply with the ethical duties delineated in this Code.
A
professional accountant is obligated to adhere tothe five essential principles outlined below:

Essential Principles

Professional Conduct
Integrity

Confidentiality
Objectivity

Professional Competence
and Due Care

that requires professional accountants to be

L. Integrity: Integrity is a fundamental principle relationships. It means being
Straightforwardand honest in all their professional and business
involves not only being honest but also
truthfuland having strong moral principles. Integrity
in financial reporting, auditing, or
avoiding any deceptive, fraudulent, or misleading behavior
any other accounting-related activities.
 5.10 Principles and Practice of Auditing

Example
a mistake in a
Acertified public accountant (CPA) working in a tax advisory firm discovers
return that would result in alarger tax liability. The accountant promptly informs the client
client's tak
ofthe the
and helps rectify it, even though it means additional tax liability for the client. This demonstrateserror
accountant's commitment to honesty and openness in their professional engagement.
2. Objectivity: Objectivity is about maintaining an unbiased andimpartial mindset.
accountants should not compromise their professional judgment due to bias, conflict of inter Professional
or undue influence. They need to make decisions and provide recommendations solely haex
on facts and professional judgment, without being influenced by personal or external
that could compromise the objectivity of their work. interests
Example
An internal auditor is assigned to evaluate the effectiveness of a department's internal
control
including those ofa close friend who works in that department. To maintain objectivity, the auditor
discloses the personal relationship to their supervisor and recuses themselves from the audit to avoid
any potential bias.
3. Professional Competence and Due Care: Professional competence and due care require
professional accountants to maintain the knowledge and skills necessary to ensure that their
clients or employers receive competent professional service. This
with the latest developments in accounting standards, laws, includes staying current
and regulations. Professional
accountantsshould also act diligently and with care in performing their
minimize the risk of errors or professional duties to
negligence.
Example
Atax consultant regularly updates their
with accurate and up-to-date advice. They knowledge on tax laws, ensuring that they can provide Clhents
also take the time to thoroughly
minimize the risk of errors that could lead to review tax returns to
financial penalties for clients.
4. Confidentiality: It is essential for a professional accountant to maintain the
of information acquired via business and confidentialy
should such information be disclosed to professional connections, Under no circumstantes
authorisation, unless there exists a legal or external parties without explicit and approptia
professional requirement mandating its diseosu
The use of secret
to be information acquired via
professional and commercial engagements need
unequivocally
external entities.
forbidden for the personal benefit of professional accountants Or ay
Example
An auditor working for a
multinational l corporation is privy to
mergers and acquisitions. The
auditor strictly sensitive information related to potential
disclosing any of this information to adheres to
confidentiality requirements, refrainingfrom
5. unauthorized
Professional Conduct: Protessional behayior parties, even in casual
conversations.
manner consistent with the good requires professional accountants to actin a
compliance with relevant laws andreputation the accounting profession. This encompasse
of
regulations, as well as avoiding any behaviorthat might
 Audit Report and Professional Ethics $.11
discredit the profession. It also includes maintaining professional independence and not
practices.
engaging in unethical
Example

Afinancialanalyst employedby a publicly traded company refrainsfrom engaging in insider trading

or other unethical financial activities. They strictly comply with all relevant securities laws and
regulations, thereby upholding the integrity of the profession and the reputation of their company.
1EAC Code of Ethics - Threats to Objectivity and Independence

The 1FAC Code of Ethics operates on the premise that assurance firms face several risks to their
integrity, impartiality, and independence, and it is imperative for these firms to establish measures to
mitigate these dangers.
There are six potential dangers that might compromise the objectivity and independence of an audit.

Objectivity and Independence of an Audit

The Self-interest Threat The Self-review Threat The Advocacy Threat

The Familiarity The Intimidation Threat Safeguards

or Trust Threat

1. The Self-interest Threat:

self-interest and its
One of the primary concerns in the field of economics is the concept of
potential negative implications.
Self-interest threat refers to a situation in which a business, network firm, or a member of
conflicts of self-interest with an
ah assurance team may have a financial interest or other
assurance customer.

8Example
client company. This
" A partner in an auditing firm owns a substantial number of shares in a
compromising their
partner might have a financial interest in the client's success, potentially
objectivity when reviewing the company's financial statements.
To mitigate this threat, the partner could divest the shares in the client company or recuse
themselves from any audit work related to that client to ensure their independence is not
compromised.
2. The Self-review
Threat:
Self-review threat occurs when
1. Prior assurance or non-assurance engagement products or judgements must be re
evaluated in order to arrive at conclusions on the assurance engagement;
 Principles and Practice of Auditing

2. A member of the assurance team has previously served as a director, officer, or as an

employee with the authority to have a direct and substantial impact on the
of the assurance engagement. subject matter
Example
Asenior auditor involved in an audit engagement was previously afinancial
same client. Their previous role involved making accounting judgments that manager
for
are now baithe
reviewed in the audit. This could create a self-review threat.
To address this, the senior auditor should not participate in the audit of the client for acotet
cooling-off period after leaving their prior employment to avoid reviewing their own worlk
Another safeguard could involve having a different auditor review their work.
3. The Advocacy Threat:
Advocacy danger arises when a company, amember of the assurance team, or a member of the
network firm, as relevant, engages in activities that endorse or might be viewed as
a position or viewpoint of an assurance client to endorsing
such an extent that impartiality may be
compromised or seem to be compromised.
This scenario may arise if a business or a member of an
assurance team were to prioritise the
judgemnent of the client above their own.
A Example
An auditing firm publicly supports a client's political
campaign or endorses a controversial
business practice that the client engages in. This advocacy
might raise questions about the
auditor's impartiality.
To mitigate the advocacy threat, the auditing firm
should refrain from making public statements
or taking actions that might be seen as
aclear boundary between
endorsing client's positions or practices. Maintainng
the
audit work and client advocacy is crucial.
4. The Familiarity or Trust Threat:
The familiarity risk occurs when there is an
excessive level of sympathy for the interests o e
assurance client, its directors, officers, employees, a company, or amember of the
team or network firm, as relevant, due assural
to a close connection.
Example
An auditor has a close
personal relationship with the CEO of a client lead Ihes
toundue sympathy for the
client's interests and decisions. company, which could
To address this
familiarity threat,the auditor may need to that
specific client to prevent undue recuse themselves from auditing
influence and ensure
5. The Intimidation Threat: independence.
Intimidation threats arise when a
member of
critical the assurance obstaclesin her
maintaining objectivity and exercising thinking due toteam faces potential
perceived or real threats from
the directors, executives, or
employees
of an assurance client.
 Audit Report and Professional Ethics <5.13

Example
AAmember of an audit team is pressured by a client's executive to overlook certain financial
irregularities during the audit, creating an intimidation threat.
To mitigate intimidation threats, auditors should have strong internal reporting mechanisms
and a clear chain of command that allows them to report any undue pressure from clients
without fear of retaliation. It's alsoimportant to have clear ethicalguidelines and principles in
place to resist such pressures.
6. Safeguards:
independence from the client company.
The primary duty of the auditor is to preserve their
Insituations when there are no viable measures to
sufficiently mitigate risks to an acceptable
limited to either terminating the activities
degree, the alternative courses of action are
declining to undertake or sustain the assurance
or interests that give rise to the risk, or
engagement.
potential measures to reduce or eliminate these
When evaluating risks toautonomy and the
into account the public interest.
risks, auditors are obligated toconsistently take
essential toacknowledge that the use of certainprecautionary measures may not effectively
Itis
appearance."
mitigate concerns about "Independence in
GB Example
financial interest in
auditor recognizes a self-interest threat because they have a significant
" Ifan
to divest those holdings to eliminate the threat to their independence.
client, they may choose position
faces an advocacy threat because they have publicly supported a client's
" If an auditor are separate from
controversial issue, they may publicly clarify that their personal views
on a appearance.
their audit work to maintain independence in

5.8 PROFESSIONAL ACCOUNTANTS IN INDIA into

nations, professional accountants may be essentially classified
nala, similar to many other
two primary groups:
Practise (PAPP) and
" Professional Accountants in Public
" Professional Accountants inBusiness (PAIB).
range of tasks and duties within the accounting profession in
coe categories contain a diverse
India.
PRACTICE (PAPP)
D0.1 PROFESSIONAL, AccoUNTANTs IN PUBLIC
operate inside public accounting companies,
Oessional accountants. in public practise typically
including accounting, auditing, taxes, and
advisory
wnere they provide adiverse arrav of services including enterprises,
their clientele. The organisation caters to a wide range of clients,
Stance to
on-profit organisations, government bodies, and people. Accountants of
affiliated with prestigious organizations like the Institute of Chartered
L Oten in promoting financial
India (1CAI), serve as trusted advisors to their clients. They play a pivotal role
 5.14> Principles and Practice of Auditing
integrity, guiding business strategies, and supporting sound financial
they provide are vital for the financial health and success of decision-making.
businesses, non-profit The services
government bodies, and individuals in India.
The Primary Functions and Duties of PAPP:
organizations,
1. Financial Statement Audits, Reviews, and
Compilations: PAPPs
conducting financial statement audits, reviews, and compilations. Auditsare responsible
for
examination of a company's financial records to provide assurance about the a
reliability of the financial information. Reviews involve a
involve thorough
plausibility,while compilations involve the preparation of limited examinationaccuracy
to eneueand
are essential for ensuring financial statements. These service
transparency and
Reliable financial statements are crucial reliability
in financial reporting.
and regulatory authorities, to make for stakeholders, such as
informed decisions and
investors, creditors
Conducting financial statement audits, reviews, and maintain trust in the business
reliability financial information.
of compilations to ensure the accuracy and
2. Tax
Consulting and
to individuals and Compliance: PAPPs provide tax consulting and
businesses. They assist clients in
obligations while minimizing compliance services
tax liabilities through understanding and meeting their tax
strategies. Efficient tax management is legitimate tax
and individuals, essential for minimizing theplanning and optimization
3. Advisory ensuring compliance with tax laws, and tax burden on businesses
Services: PAPPs offer advisory services in optimizing financial resources.
financial planning, mergers various
expert guidance to clients, and acquisitions (M&A), and areas, risk
including business strategy,
and strategic goals. helping them make informed management. They provide
Advisory services help clients navigate
challenges,make informed investment decisions to achieve their financial
4. Forensic complex financial and businesSS
Accounting and Fraud decisions, and effectively manage risk.
forensic accounting and fraud Investigation: PAPPs are often called
activities are suspected. Theyinvestigation services when upon to perTorm
evidence, and provide expert use their financial
expertise to uncover financial irregularities
or fraudulent
Forensic accounting and fraud witness testimony when required. misconduct, gauo
financial fraud,
embezzlementinvestigation
financial health and ,
services when financialreputation.
services are essential for
and other ilicit
activities that can detecting and addressing
5. irregula ritiePerforming
s forensic
accounting
harm an organization's
Regulatory Compliance: are
suspected. and fraud investigation
accounting
accounting standards, PAPPs assist clients in
ensuring that financial complying with
frameworks. They
reporting and disclosure. help statements regulatory
adhere
requirements and

Regulatory compliance is crucial organizations navigate the complex landscape of financial

to the applicable legal ano

adherence in financial for

and reputational damage.reporting. maincomply
Failure to taining twithransparency, accountability, and legal
regulations can lead to legal issues
 Audit Report and
Professional Ethics
5.8.2 PROFESSIONAL AccoUNTANTS BUSINESS (PAIB)
IN
Professional.accountants are
variety of tasks
employed by businessesin boththe public and
Theyplayya and carry out a variety of
duties in relation to private sectors of India.
ond financial management. reporting, internal controls,
be certified as
InIndia, PAIBs may public accountants (CPA),
(CMA), or chartered certified management accountants
accountants(CA), among other credentials. They
(ing efficient financial management, play crucial
multifaceted governance, and control procedures
responsibilities in
inside
PAIBS roles encompass not only
financial management but also
organisations.
management, contributing to the overall
success of the organizations they serve. governance and risk
lin navigating the complex financial and regulatory Their expertise is
landscape of the Indian business environment.
The Primary Functions and Duties of PAIBs
1. Financial Planning and Analysis: PAIBs are
involved in financial planning, budgeting, and
forecasting to support strategic decision-making. They provide critical insights into the
financial health of the organization, helping in the allocation of
resources, setting financial
goals, and making informed decisions.
Financial planning and analysis are crucial for long-term sustainability and growth. PAIBs
ensure that the organization's financial resources are optimally utilized.
2. Management Accounting: PAIBs assist organizations in cost management, performance
evaluation, and internal reporting. They work on developing systems for tracking costs,
analyzing profitability, and improving operational efficiency.
Efective management accounting enables organizations to control costs, optimize resource
allocation, and make data-driven decisions to enhance their competitiveness and profitability.
3. Internal Auditing: Some PAIBs work in internal audit functions, conducting internal reviews to
ensure compliance with policies and procedures. They identify areas for improvement, assess
internal controls,and provide recommendations for enhancing operational effectiveness.
Internal auditing helps organizations maintain transparency, accountability, and compliance.
It also identifies and mitigates operational risks and fraud, contributing to better governance.
4. Risk Management: PAIBS play a vital role in identifying and managing financial and
operational risks. They develop risk management strategies, assess the impact of risks, and
establish control measures toprotect the organization's interests.
Effective risk management is essential for safeguarding the organization's financial stability
and reputation, particularly in an environment where various riskscan impact operations.
5. Compliance and Financial Reporting: PAlBs are responsible for financial reporting and
ensuring compliance with accounting standards. They oversee the preparation of financial
Statements that provide a true and fair view of the organization's financial position.
Compliance and accurate financial reporting are crucial for maintaining trust among
Stakeholders, including inyestors, regulators, and the public. It is vital for transparency and
accountability.
5.16> Principles and Practice of Avditing
6. Corporate Governance: PAlBs contribute to good corporate governance practice
their organizations. They often participate in governance structures, helping to establish and
maintainethical standards and effective governance frameworks.
Strong corporate governance is essential for building trust among stakeholders,
financial impropriety, and ensuring thatthe organization operatesin the best
various stakeholders.
preventofingits
interests
5.9 FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS
Various profession's behaviour andconduct are governed by aset ofbasic rules knownas profoesio.
ethics. In their contacts with customers, colleagues, the public, and the profession itself, professia
should maintain their integrity, trustworthiness, and responsibility. Despite the fact that
profession may have different particular rules, some basic rules of business ethics include:
1. Integrity: Professional ethics are built on the principle of integrity. It entails being sincere
telling the truth, and acting morally in all of one's professional and private dealings
Professionals shouldavoid dishonesty, fraud, and misrepresentation and always be open and
honest in their interactions.
2. Confidentiality: Professionals often have access to private and sensitive data pertaining to
their customers or organisations. Confidentiality is keeping this information secure and not
revealing it to unauthorised people or organisations. The promise that expertswould protect
sensitive information is the foundation of trust.
3. Objectivity: Professionals must retain objectivity and refrain from letting personal prejudice
or conflicts of interest skew their judgement and decision-making. They must provide services
or recommendations that are impartialand fair.
4. Professional Competence and Due Care: Professionals should have the information,
abilities, and competence necessary to carry out their jobs effectively. Additionally, they are
in charge of keeping up with industry advances and rendering services with the necessary
caution, attentiveness, and completeness.
5. Professional Behaviour and Responsibility: The reputation of their profession is requreu
of professionals, and this includes how they behave themselves. They must behave in the best
interests of their customers or organisations and adhere to all applicable laws, rules, and
ethical standards.
and
6. Independence: Independence is especially important in fields like law, accounting
auditing. In order to prevent excessive influence or prejudice from influencing theirjjudgements
and choices, professionals must retain their independence, both in appearance aandin reality.
7. Accountability and Transparency: Professionals need to be prepared to acceptaccountability
be
for their deeds and choices. They should be open and honest about their procedures and
preparedtodefend their professional behaviour when required.
needto
8. Social Responsibility: Professionals are held to a higher standard by society. They area
think about how their behaviour affects society and make an effort toimprovethelocal
and the environment.
 Audit Report andProfessional Ethics <$.17
Continuous Professional Development: Professionals need to commit to ongoing growth
and learming. To stay current with developments in their area and retain their competency,
periodically refresh their knowledge and abilities.
they need
Client or Stakeholder Interests: Professionals have a duty of confidentiality to act in the
10. stakeholder's or clients best interests. They must put their customer's needs and welfare first
obligation.
inorder to fulfil this
for Diversity and Inclusivity: All people should be treated with respect by
11. Respect
professionals, regardless of their origin, identity, or traits. In their workplaces, they need to
environment.
promote an inclusive and varied
12 Whistleblowing and Reporting:
Professionals should have systems in place to report
they occur inside their company or
unethical behaviours or ethical breaches, whether
safeguard the public interest and preserve
throughout the industry. Whistleblowing may assist
the profession's credibility.
Summarising the key Points

Audit report
that is generated by an auditor or an audit firm subsequent to
document or any
An audit report isa formal company's financial statements, records, internal controls,
Completingan investigation of a
other pertinent information.
Types of audit report
1. Clean report
2. Qualified report
3. Disclaimer report
4. Adverse opinion report
|Independent audit report provided by an external or internal auditor
evaluation company.
independent Auditor's Report is a formal statements that have been compiled by a
|An the financial
precision of
dbout the integrity and personal and
both
Professional Ethics guiding principles in
norms of conduct, beliefs, and
Professionally recognised as professional ethics.
|Professional life are referred to
Codes of Professional Ethics 2. Integrity
objectivity 4. Professional scepticism
1. Independence and with accounting
standards
3. Professional competence 6. Compliance
5. Confidentiality
8. Transparent reporting
10. Documentation
7. Reporting objectivity regulatory
legal and
9. Unbiased opinion 12. Compliance
11.Ethical dilemmas
Professional Accountants in India
Practice (PAPP)
1. Professional Accountants in Public
Business (PAIB)
L. Professional Accountants in
S.18> Principles and Practice of Auditing

5.10 REVIEW QUESTIONS

SECTION-A

TwoMarks Questions
1. Define audit report.
report.
2. Mention any four components of audit
3. Mention the types of audit report.
4. What is adverse opinion report?
5. What is disclaimer report?
What is qualified report?
7. Give the meaning of Independent auditor.
8. Expand IFAC, PAPP & PAIB.
SECTION B

Five MarksQuestions
9. Explain the types of audit reports.
10. Explain the role of professional accountants in public practices.
11. Explain the role of Professional Accountants in Business.
SECTION C
Twelve Marks Questions

12. Explain the fundamental principles of Professional ethi

13. Explain the IFACcode of ethics for professional accountants
14. Explain the role Independent auditor. Draft a specimen Illustration.