NHG & Co., Chartered Accountants, is statutory auditor of M/s Backlog Private Limited (BPL) for the F.Y. 2023-24. BPL is engaged in providing…

As per SA 501 if the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek direct communication with the entity's external legal counsel. Further, as per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report", the auditor shall report an uncertainty relating to the future outcome of exceptional litigation or regulatory action. In addition to above, the auditor's report shall also state whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement as per Section 143 (3) of the Companies Act, 2013. In the given case, M/s BPL received a notice to deposit fee for violating norms. It went into litigation and filed an appeal which is pending for decision as at the end of the financial year. The company has disclosed the same in the financial statements. The auditor should assess that pending appeal requires adjustment in financial statements. He should ask company management to make necessary adjustment to the financial statements. If adjustment is not made by management, he should consider the impact on auditor's report and report accordingly. Alternative Solution: As per SA 706 (Revised) on "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report”, the auditor shall report an uncertainty relating to the future outcome of exceptional litigation or regulatory action under Emphasis of Matter paragraph. When the auditor includes an Emphasis of Matter paragraph in the auditor's report, the auditor shall: (i) Include the paragraph within a separate section of the auditor's report with an appropriate heading that includes the term "Emphasis of Matter"; (ii) Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements. The paragraph shall refer only to information presented or disclosed in the financial statements; and (iii) Indicate that the auditor's opinion is not modified in respect of the matter emphasised.