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THIS has reference to the article `Qualified Report is an in-between thing' that appeared in the column `For the Asking', Business Line dated May 16.

We wish to clarify the following: i) what negative report is and in what situations an auditor issues a negative report; ii) why negative reports are so rarely seen; and iii)

to whom does the auditor owe a duty of care and responsibility.

An auditor's report is the culmination of the work done by him during the course of the audit. It is, therefore, necessary that the auditor's report is comprehensive and informative yet concise, efficiently and effectively communicating to the users, the auditor's opinion on the financial statements subject to audit. One of the Auditing and Assurance Standards, namely, AAS 28, The Auditor's Report on Financial Statements, lays down standards in respect of preparation of the auditor's report. Among other things, the said Standard also guides an auditor on the type of opinion to the issued under various circumstances — a qualified opinion, a negative or an adverse opinion, disclaimer of opinion.

i) Circumstances warranting a negative opinion: An adverse opinion is expressed when the effect of a disagreement with the management regarding acceptability of the accounting policies selected, the method of their application or the adequacy of financial disclosures is so material and pervasive to the financial statements that the auditor concludes that qualification of the audit report (appearing as a "subject to" opinion) is not adequate to disclose the misleading nature of the financial statements.

Such circumstances could be where all the qualifications taken together substantially affect the profit and loss as shown in the profit and loss account, including where the profit is converted into a loss or vice versa.

ii) Why negative opinions are rare: Normally, where the auditors of the company decide to give a report which is other than a clean port, they normally discuss the contents of the report with the company's management and make their views clear so that an opportunity may be afforded to the management to consider the issues involved. Though it is sometimes believe that by discussing their proposed qualifications/comments with the management and thereby giving the management an opportunity to meet the auditors' objections or offer their explanations, the auditors might prejudice their independence, it is in fact not so.

The truth is that the auditor has the final right and duty of deciding whether or not to give a report which is other than a clean report and the management (directors) of the company have a statutory duty to comment in their report on every qualification/comments contained in the auditor's report.

For this reason also, prior discussion between the management and the auditors of proposed qualifications/comments in the auditor's report is necessary. The explanations given by the management and response to discussion of the auditor's proposed qualifications/adverse comments might also assist the auditors in framing the qualifications/comments more accurately when drafting their final report to the shareholders.

Finally, it should also not be forgotten that most important and fundamental purpose of the company's financial statements is to present a true and fair view of the state of affairs of the company and the results of its operations. Discussion of proposed qualifications on adverse comments with the managementto convince them of the auditor's viewpointmay be more useful than giving a negative report on financial statements prepared by the management .

iii) To whom does the auditor owe a duty: It is true that it is generally the management of the company which appoints and fixes the remuneration of the auditor. Nevertheless, this prerogative of the management is not without a requirement for approval by the shareholders at the annual general meeting (AGM) under the Companies Act, 1956. Further, all reasonably aware investors and other individuals in the society know that all said and done, the auditor is required to make a report, ultimately, to the members (shareholders) of the company as to his opinion on the truth and fairness of the financial statements of the company audited by him.

At the end, we wish to summarise by reiterating that the auditors exercise independent judgment and express their opinion regardless of the views held by the management of the company and without regard to any consequences which the qualifications might have upon the future of the financial standing of the company and cannot, under warranting circumstances, escape the unpleasant duty of giving a report which is other than a clean report. Neither has the auditor the option to refuse to submit the report.

Vijay Kapur,

Secretary, Auditing and Assurance Standards Board

The Institute of Chartered Accountants of India

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