During the statutory audit of Kavya Industries Ltd. for the year ended March 31, 2026, the auditor completed the audit of the financial statements…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · November 2026
During the statutory audit of Kavya Industries Ltd. for the year ended March 31, 2026, the auditor completed the audit of the financial statements and was in the process of finalising the auditor's report. The company's annual report also contained a Directors' Report, which was not part of the audited financial statements. Before the date of the auditor's report, while reading the Directors' Report, the auditor noted that it stated that the company's revenue had increased by 22% during the year, whereas the audited financial statements showed that revenue had increased by only 9% over the previous year. The auditor confirmed that the figures and disclosures in the audited financial statements were correct and that the difference arose solely from an incorrect statement in the Directors' Report. In the above circumstances, which of the following is the most appropriate course of action for the auditor?
(A) (a) Modify the audit opinion on the financial statements, since the inconsistency between the Directors' Report and the audited financial statements represents a material misstatement affecting the annual report.
(B) (b) Request management to correct the Directors' Report and, if management refuses and the auditor concludes the other information is materially misstated, communicate the matter to those charged with governance and consider the implications for the auditor's report in accordance with SA 720.
(C) (c) Take no further action, since the Directors' Report is outside the financial statements and the auditor's responsibility under SA 720 does not extend to information contained in the annual report other than the financial statements.
(D) (d) Withdraw from the audit engagement, since management's refusal to correct a material misstatement in the Directors' Report constitutes a scope limitation that prevents the auditor from expressing an opinion on the financial statements.

Suggested Answer and Working Notes:

Correct Answer: Option (B)

As per SA 720, “The Auditor’s Responsibilities Relating to Other Information”, the auditor's responsibility is to read the other information and consider whether there is a material inconsistency between the other information and the financial statements or the auditor's knowledge obtained in the audit. If a material inconsistency is identified, the auditor shall request management to correct the other information. In this case, there is a material inconsistency between the revenue growth reported in the Directors' Report (22%) and the audited financial statements (9%). The auditor has confirmed that the financial statements are correct and the inconsistency is due to an incorrect statement in the Directors' Report. Therefore, the most appropriate course of action is to request management to correct the Directors' Report. If management refuses and the auditor concludes that the other information is materially misstated, the auditor should communicate the matter to those charged with governance and consider the implications for the auditor's report in accordance with SA 720.

Topics: Standard on Auditing (SA), Reporting

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