The notes and the auditor
The statements are the headline and the notes are the article. The auditor's opinion comes in four flavours, and a listed company has to file a standard statement saying what the qualifications cost — which nobody reads.
Chapter 7 · Beginner
Everything difficult about a company is disclosed, and almost all of it is in the notes.
The auditor's opinion
The audit report sits before the statements, and its conclusion comes in four forms. They are not degrees of the same thing — the gaps between them are large.
Unmodified (clean). The statements give a true and fair view. This is the normal case and it is the floor rather than praise.
Qualified. True and fair except for a specific matter the auditor identifies. Something is wrong or unverifiable, and the auditor has named it and judged the rest sound.
Adverse. The statements do not give a true and fair view. The auditor is saying the accounts are wrong. This is very rare and very serious.
Disclaimer of opinion. The auditor could not obtain enough evidence to form an opinion at all. Also rare, also serious, and in some ways worse than adverse: nobody is telling you what the position is.
The distinction most people miss: a qualification is not a stylistic quibble. It is a professional saying this particular number cannot be relied on.
The filing that tells you without reading
SEBI makes this unusually easy, and it is the most actionable thing in the chapter.
Under Regulation 33(3)(d), a listed entity files audited annual results "along with audit report and Statement of Impact of Audit Qualifications, if applicable." Where the opinion is unmodified, it files a declaration instead.
So the filing announces, in a standard document, whether the auditor had reservations — and if so, quantifies their impact. You do not have to read the audit report to find out that there is something to read.
A Statement of Impact of Audit Qualifications existing at all is a signal. Its contents are the next thing to read, before any ratio in this subject.
Key audit matters
Modern audit reports include key audit matters — the areas the auditor considered most significant, usually because they involved the most judgement.
These are extremely useful and under-read, because the auditor is pointing at the parts of the accounts where estimates matter most. Revenue recognition on long contracts, valuation of a particular asset, recoverability of receivables, impairment of goodwill. The auditor is telling you where the accounts are softest.
The notes that repay reading
In rough order of information per minute:
Revenue and segments. Where the money comes from, by business and geography. Chapter 4.
Related party transactions. Dealings with connected entities. Under SEBI's rules, a related party includes anyone covered by the Companies Act 2013 or the applicable accounting standards — SEBI's FAQ is explicit that meeting "either of the two" is enough — plus anyone in the promoter or promoter group, and anyone holding 10% or more of the equity at any time during the immediately preceding financial year.
This note exists because the terms may not be arm's length. Revenue that depends on a relationship rather than a market is a different kind of revenue. Chapter 15.
Contingent liabilities. Obligations not on the balance sheet because they have not crystallised — tax disputes, guarantees, litigation. Real, sized, and deliberately outside the numbers you just read. Compare the total with profit and equity.
Borrowings. Maturity profile, rates, security, covenants. Chapter 12 needs all of it, and none of it is on the face of the balance sheet.
Employee benefits and share-based payments. Options in issue dilute existing holders, which chapter 5 of the equity subject covers and which no share price chart shows.
Property, plant and equipment. Additions, disposals, and the useful lives assumed. Depreciation is an estimate and this is where the estimate is stated.
The habit that finds the most
Read this year's note against last year's.
Accounting policy changes, revised estimates, a new related party, a contingent liability that grew, a segment that stopped being reported — these are visible by comparison and invisible otherwise. Nobody is obliged to highlight that something changed; they are obliged to disclose both years, and the difference is yours to find.
What the audit does not do
The limits, stated plainly because they are widely misunderstood.
An audit gives reasonable assurance, not a guarantee. It is not designed to detect every fraud, particularly where management colludes to conceal one.
It says nothing about whether the business is any good, whether the strategy will work, or whether the shares are worth their price. It addresses whether the statements fairly present what happened.
So a clean opinion is the beginning of your work rather than a conclusion about the company.
The point
The opinion comes in four forms and a qualification means a specific number cannot be relied on. A listed company must file a Statement of Impact of Audit Qualifications where the opinion is modified, which tells you there is something to read without reading it. Key audit matters point at where the accounts are softest, and the notes against last year's notes is where changes become visible.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Find the contingent liabilities note in one annual report and compare the total with the company's net profit. If it is a multiple of profit, read what the items are.
Contingent liabilities are obligations not on the balance sheet because they have not crystallised. Tax disputes are the most common large item.