DEF Apparels Ltd. is a manufacturing company with its business having a global outreach. The company appoints CA Y as the statutory auditor for the…

In the present case, CA Y, the statutory auditor of DEF Apparels Ltd. for the financial year 2024–25, is unable to obtain sufficient and appropriate audit evidence in respect of following matters that are material and pervasive to the financial statements: The company's fixed assets amounting to 250 crores constitute about 60% of the total assets and were significantly damaged due to flash floods during the year. However, management refused to permit an independent valuation of the damaged assets and relied solely on internal estimates. Despite visible damage to machinery and buildings and pending insurance claims with disputes regarding coverage, the company has not made any provision for impairment loss. Due to this management-imposed limitation, the auditor is unable to assess the impairment, if any, and consequently cannot ascertain the carrying value of fixed assets. The company entered into related party transactions aggregating to 120 crores during the year. Management refused to provide complete documentation relating to these transactions and denied access to board meeting minutes citing confidentiality agreements. As a result, the audit team was unable to verify the commercial rationale, arm's length nature, completeness, and adequacy of disclosure of such related party transactions. The auditor was therefore unable to obtain sufficient appropriate audit evidence in respect of these transactions. In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive as per SA 705. Thus, CA Y should give a Disclaimer of Opinion. The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion paragraph is as under: Disclaimer of Opinion We were engaged to audit the financial statements of DEF Apparels Ltd. ("the entity"), which comprise the balance sheet as at March 31, 2025, the statement of Profit and Loss, [the statement of changes in equity (where applicable)] and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. We do not express an opinion on the accompanying financial statements of DEF Apparels Ltd. because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements. Basis for Disclaimer of Opinion The Company's manufacturing facility, carrying a value of 250crores (representing 60% of total assets), sustained significant physical damage due to flash floods during the year. The management has neither allowed an independent valuation nor recorded any impairment provision. In the absence of a formal assessment and given the pending insurance disputes, we were unable to determine the extent of the required write-down and its consequential impact on the financial statements. We were unable to verify the completeness, commercial rationale, and arm's length nature of related party transactions totalling 120crores. Management refused to provide supporting documentation and denied us access to the minutes of the meetings of the Board of Directors citing confidentiality agreements. Consequently, we were unable to verify the commercial rationale, arm's length nature, and completeness of disclosures of these related party transactions.