True and Fair View in Auditing:
The concept of “true and fair” holds special significance in auditing. An auditor has to express an opinion on the truthfulness and fairness of the accounts audited by him. In fact, it is the primary objective of an audit to comment on the true and fair view.
The phrase “true and fair” signifies that an auditor should report whether or not the state of affairs and the results of the business as examined by him in the course of his audit are truly and fairly represented in the accounts under audit.
For this, the auditor is required to ascertain that all the assets, liabilities, incomes and expenses stated in the client’s books of account are recorded and disclosed in accordance with relevant accounting policies. Also, he is required to ensure that the generally accepted accounting principles have been fully adhered to by the client’s entity while preparing the financial statements. Further, no material amount, item or transaction should have been omitted from being recorded in the books.
In addition, it is the duty of the auditor to check that all assertions made by the management are correct and that they do not mislead the users of financial statements.
Does the law specify what is “true and fair view” in auditing?
What constitutes a true and fair view has not been clearly defined under any legislation. However, in the context of a company, Section 129 of the Companies Act 2013 states that a company shall be deemed as not disclosing a “true and fair view” if it fails to disclose any matter that is required to be disclosed in accordance with the provisions of Schedule III to the Act or any other governing rules/regulations.
Here, it must be understood that adherence to the disclosure requirements as laid down under the law is only the minimum condition. If a piece of particular information is necessary to be disclosed in order to constitute a true and fair view and to show the correct picture of the state of affairs, it must be disclosed even though there may not be any specific legal provision or regulation to do so.
An auditor has to examine the overall correctness and authenticity of the accounts before arriving at a conclusion.
Thus, assessing what constitutes a true and fair view is a matter of the auditor’s judgment and it should be seen in response to the particular circumstances of each case.
A few matters to be examined in auditing to assess the “true and fair view”
To be more specific, in order to ensure that the accounts give a true and fair view, an auditor has to check the following things:
1. That the assets are neither undervalued nor overvalued in books, according to the applicable accounting standards and principles.
2. That no material asset, item, or information is omitted.
3. That the assets are actually in existence and belong to the client’s entity.
4. That the charge, if any, on the assets is properly disclosed.
5. That no material liability is omitted from being recorded.
6. That there is an adequate internal control system regarding the acquisition, utilization, and disposal of assets.
7. That the profit and loss account is prepared in line with applicable regulations and it discloses all the matters which are required to be disclosed by Part II of Schedule III
8. That the balance sheet discloses all the matters which are required to be disclosed by Part I of Schedule III
9. That all unusual, exceptional or non-recurring items have been separately disclosed.
10. That the accounts have been prepared in conformity with the concerned law, for example, the Banking Regulation Act, 1949 for a banking company, the Electricity Act, 2003 for a company engaged in the generation or supply of electricity, etc.
11. That the accounts are drawn up on generally accepted accounting principles on a consistent basis.
12. That the financial statements overall convey the requisite information clearly.
The expression of opinion by an auditor is closely related to the concept of “true and fair”. The main goal is to state if the financial statements of the client accurately depict the actual financial position at the end of the accounting period and the profit or loss for that period. What is true and fair is a matter of the auditor’s judgment in a given case.
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