BACKGROUND: Forming an opinion on the financial statement (FS) by the auditors and reporting is dealt by revised SA 700 (unmodified opinion). For modified opinion revised SA 705 is required to be followed. Modified opinion (qualified opinion) are basically given under two circumstances i.e. (a) based on audit evidences available the FS is not free from material misstatement or (b) unable to obtain sufficient evidences on FS and hence auditors are required to modify their opinion. Further revised SA 706 (effective from 1st April 2018) states about the additional communication by the auditors to draw the attention of users of FS for certain issue which are of prime importance. These additional observations by the auditors are given in the auditor’s report in the form of “Emphasis of the matter “or “Other matters “. Such a way of reporting is not a modified opinion and at the same time important issues are communicated to the users of FS. IN view of COVID-19: ICAI has published Auditor’s Reporting Key Audit Considerations amid COVID-19 whereby the auditors have to consider the impact of COVID-19 for reporting purpose as regards to: (i) Whether sufficient and appropriate audit evidence is available? (ii) Whether the impact on the business has been assessed by the management (cash flow, revenue / operation)? (iii) Events occurring after year end and before issuance of report (iv) Impact on the going concern concept due to Covid -19. (v) Whether disclosure of impact has been made in FS by the management? After assessing the above the auditors has to take call whether to issue unmodified, modified or report with Emphasis or other matter or a clean report. As per the publication issued by ICAI, it suggests issuing modified report under the following circumstances: (a) Failure to recognize adequate impairment of assets (whole assets including current assets) (b) adequate provision for obligation not made (c) no proper disclosure of assessment of impact of covid-19 where there is adverse impact on FS (d) Due to lock down etc the auditors are not able to obtain sufficient evidences so as to conclude that FS are free from material mis statement Where going concern has been affected (for this separate guideline has been issued by the ICAI) the reporting would be in accordance with SA 570. Further the publication also suggest that : wherever the management has made substantive disclosures of Covid-19 related issues in the FS and the auditors are satisfied about its assessment and its adequacy then the EMPHASIS OF MATTER paragraph may be included in the auditor’s report in the following manner : “Emphasis of matter – (EOM) Effects of COVID-19 We draw attention to Note X in the Financial statements, which describes the economic and social [consequences/disruption] the entity is facing as a result of COVID-19 which is impacting [supply chains / consumer demand/ Financial markets/commodity prices/ personnel available for work and or being able to access offices]. Our opinion is not modified in respect of this matter.” Takeaways: Undoubtedly almost all the business has been adversely affected in some form or other Due to COVID-19. The auditor has to issue his opinion based on: (a) sufficient appropriate audit evidence (b) whether uncorrected misstatements are material, individually or in aggregate (c) Further evaluation as required vide Para 12-15 of SA 700(Revised) It is also noticed that maximum impact would be in the current financial year 2020-21 but the current period of April to May/June or till the date of signing the report, the auditors would be able to assess the recoverability/payment of assets and liabilities on 31st March 2020 as regard to debtors , stock, advances , other receipts , creditors etc. Further they shall be in a position to well assess the impact of Covid in FS 2020-21 also. In view of the above the following can be summarized: 1. A suitable note stating that the Impact of COVID -19 should be given in Notes to Accounts. Estimation uncertainty relating to the global health pandemic on COVID-19 In assessing the recoverability of receivables including unbilled receivables, contract assets and contract costs, goodwill, intangible assets, and certain investments, the Company has considered internal and external information upto the date of approval of these standalone financial results including credit reports and economic forecasts. The Company has performed sensitivity analysis on the assumptions used and based on current indicators of future economic conditions, the Company expects to recover the carrying amount of these assets. The impact of the global health pandemic may be different from that estimated as at the date of approval of these standalone financial results and the Company will continue to closely monitor any material changes to future economic conditions. 2. The auditors reporting be given for EOM pattern (SA 706) and the example of such reporting are: as given above / suggested by this guideline. <> Further Additional Notes/points worth noting are: 3. ICAI COVID-19 FAQs on Ind AS- FAQ 45 Question- In this highly challenging scenario of COVID-19, which is rapidly evolving day by day, there are significant uncertainties about the future economic scenario. How does an entity determine whether it is still a going concern? What disclosures are required to be made in the financial statements in this regard? Answer: Management typically relies upon historical financial results, known changes in the business and competitor and industry data to provide evidence of the reasonableness of the assumptions used in its assessment. However, given current economic and market conditions, historical results may be unlikely to provide a basis for future cash flows and therefore management may need to consider additional sources of information when evaluating the reasonableness of the assumptions used in its assessment. Assessment of whether the entity is a going concern is a matter of judgment. In case of material uncertainty, it should be pointed out in the Auditor’s report. Where the management concludes, given the entity’s facts and circumstances, that no material uncertainty exists that needs to be disclosed, but the conclusion required application of significant judgment, then the judgment made should be disclosed as per paragraph 122 of Ind AS 1. This talks of IND AS however we can use it as good practice in MSME Financial Statements as well. 4. FAQ 48 Due to COVID-19 significant impairment is recognized in intangible assets held by the entity. Similarly, the huge loss has been recognised due to the recognition of inventory at Net Realisable Value, which is significantly lower than its cost. Can these losses be treated as extraordinary and disclosed separately in the Statement of Profit and Loss? Alternatively, can these items be considered as Exceptional Items of Income and Expense and disclosed separately? Answer: Generally, items of income or expense fulfilling the abovementioned criteria are classified as exceptional items and are disclosed separately. From the above, it appears that all material items are not exceptional items. In other words, exceptional items are those items which meet the test of ‘materiality’ (size and nature) and the test of ‘incidence’. Accordingly, these items can be disclosed separately as ‘exceptional items’ in financial statements if they meet the test of ‘materiality’ and ‘incidence. In this regard, it may also be noted that Schedule III to the Companies Act, 2013, also specifically requires a line item for ‘exceptional items’ on the face of statement of profit and loss. Disclaimer Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The Authors accepts no responsibility for loss arising from any action taken or not taken by anyone using this publication.