ABC Limited is a listed manufacturing company engaged in heavy engineering activities. During the audit of its financial statements for the year…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · May 2026
ABC Limited is a listed manufacturing company engaged in heavy engineering activities. During the audit of its financial statements for the year ended 31st March 2025, the statutory auditor noted the following: The company has overstated closing inventory by - 8.75 crore due to incorrect valuation of obsolete stock, which has resulted in overstatement of profit before tax by the same amount.The company has not disclosed a material pending litigation of 12 crore relating to environmental penalties, which is required to be disclosed under applicable financial reporting framework. The auditor has obtained sufficient appropriate audit evidence in respect of both the matters. However, management has refused to adjust the inventory valuation and has also declined to disclose the pending litigation. The auditor has concluded that the misstatements are material but not pervasive to the financial statements. Required: (a) Explain how the auditor should report the above matters in the audit report, with specific reference to the “Basis for Opinion” section.

Suggested Answer and Working Notes:

Since the auditor has identified material misstatements in the financial statements and management has refused to rectify the same, the auditor is required to modify the audit opinion in accordance with SA 705 (Revised), "Modifications to the Opinion in the Independent Auditor's Report". Amendment in Heading: When the auditor modifies the opinion, the auditor shall amend the heading "Basis for Opinion" to "Basis for Qualified Opinion", since the misstatements are material but not pervasive. Description of the Matter: Within this section, the auditor shall include a description of the matter giving rise to the modification. In case of overstated closing inventory, the auditor shall describe that closing inventory is overstated by - 8.75 crore due to incorrect valuation of obsolete stock, resulting in overstatement of profit before tax by - 8.75 crore. Further, this relates to specific amounts in the financial statements, the auditor shall include a description and quantification of the financial effects of the misstatement (₹ 8.75 crore overstatement of inventory and profit). Non-Disclosure of Required Information: In respect of the non-disclosure of pending litigation of 12crore, the auditor shall: (i) Discuss the non-disclosure with those charged with governance. (ii) Describe in the "Basis for Qualified Opinion" section the nature of the omitted information (i.e., pending environmental litigation of 12crore required to be disclosed); and (iii) Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted information.

Topics: Standard on Auditing (SA)

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