Hortiko Ltd. is a logistics company that maintains its primary inventory and research assets in a specialized cold-storage facility. On April 5,…

CA Final · Advanced Auditing, Assurance and Professional Ethics · PYQS · May 2026
Hortiko Ltd. is a logistics company that maintains its primary inventory and research assets in a specialized cold-storage facility. On April 5, 2026, a massive technical failure in the cooling systems led to the spoilage of specialized raw materials valued at 21 crore. This event occurred after the balance sheet date but before the financial statements were authorized for issue. Management has determined this to be a 'non-adjusting event' and has provided a detailed disclosure in Note 28 to the Financial Statements, explaining the financial impact and the status of the insurance claim. The statutory auditor, after performing subsequent event procedures, is satisfied with the disclosure and has concluded that the matter is fundamental to the users' understanding of the financial statements. However, the auditor has also confirmed that this event does not impact the 'Going Concern' assumption for the foreseeable future. Considering the above facts, state the reporting requirements under relevant Standard on Auditing and draft a suitable paragraph to be included in the Independent Auditor's Report.

Suggested Answer and Working Notes:

In the given case of Hortiko Ltd, a technical failure in the cold-storage facility on April 5, 2026, resulted in spoilage of raw materials worth 21crore after the balance sheet date but before authorization of the financial statements. Management has appropriately treated the matter as a non-adjusting event and disclosed the financial impact and insurance claim details in Note 28. The statutory auditor, after performing subsequent event procedures under SA 560, is satisfied that adequate disclosure has been made and has also concluded that the event does not affect the going concern assumption. However, as the matter is fundamental to the users' understanding of the financial statements, the auditor should include an Emphasis of Matter paragraph in accordance with SA 706, while expressing an unmodified opinion. When the auditor includes an Emphasis of Matter Paragraph in the auditor's report, the auditor shall: Include the paragraph within a separate section of the auditor's report with an appropriate heading that includes the term "Emphasis of Matter";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; andIndicate that the auditor's opinion is not modified in respect of the matter emphasized. Emphasis of Matter We draw attention to Note 28 of financial statements regarding the technical failure in the cooling systems at the Company's specialised cold-storage facility on 5 th April, 2026, subsequent to the Balance Sheet date, which resulted in spoilage of specialized raw materials valued at 21 crore. This event has been considered by the Management as a non-adjusting event and appropriate disclosure has been made explaining the financial impact and status of the insurance claim. Our opinion is not modified in respect of this matter.

Topics: Standard on Auditing (SA), Professional Ethics & Liabilities of Auditors

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