An explanatory is meant to explain or supplement a matter contained in or related to financial statements. The matter on which an explanatory note is given is one on which the auditor has not taken adverse view,
e.g. note on regrouping of figures of previous year or an information on the basis of allocation of a common expense. Explanatory notes are given by the directors of the company and are usually shown under “Notes to accounts”. Such notes may also appear elsewhere in the statements of account. All notes to account, wherever shown, constitute an integral part of the accounting statements.
Qualificatory notes also refer to the matters stated in the statements of accounts and usually are included under “Notes to account” along with the explanatory notes. Qualificatory notes are such notes on which the auditor has taken and adverse view e.g. payment of managing director‟s remuneration when the government‟s approval is awaited. In view of their impact on the statements of account and on the resulting audit report, the auditors refer to the qualificatory notes in the audit report itself in a specific manner by identifying the notes on which they have taken an adverse view and drawing attention of the shareholders thereto. The auditors usually refer to the qualificatory notes by the use of the prefix “subject to” in their report. One important point to be noted in this connection. Qualificatory notes are put by the directors as they are also equally obliged to make the disclosure of the adverse position. Since, both the directors and the auditors require to make the qualificatory notes to accounts with mutual agreement, thereby dispensing with the necessity of repeating the same note twice, one under the notes to accounts and again under the audit report.