"The adoption of the guidance note would provide timely guidance to all auditors in the discharge of their attest functions prior to finalisation of their audits for year 1998-99," said ICAI president Rahul Roy. The guidance note takes into account the latest pronouncements of the International Federation of Accountants on the Y2K issue, he added.

According to the Institute, if in addition to the audit the auditor is asked to assist the client on preparations with the year 2000 date change or certify Y2K compliance of the systems, these should be considered as separate engagements and appropriately separate engagement letters be issued.

According to the note, the Y2K problem arises both on account of hardware and software. The issue may manifestitself before, on or after January 1, 2000, and its effects on financial reporting and operations may range from inconsequential errors to business failure.

It further adds that the Y2K bug not only affects computer systems, but also equipment using embedded microprocessors like telephone exchanges, power stations, aircraft and air traffic control equipment where dates are involved.

While providing guidance on the impact of the Y2K issue in an audit of financial statements, the institute has made it clear that it is the management's responsibility to ensure that the entity adequately addresses the Y2K issue. The auditor's responsibilities outlined in statements on auditing practices (SAPs) issued by the institute have not changed. It also clarifies that the auditor obtains a sufficient understanding of any material impact of the issue on the financial statements subject to audit.

The objective of the note is to assist in clarifying the respective responsibilities of the management and the auditor, tosuggest inquiries the auditor is required to make from the management, provide guidance in the application of SAPs to the Year 2000 issue.