CA Ananya has been appointed as the statutory auditor of PQR Ltd. (the parent company) as well as of every subsidiary, wholly owned and partly…

As the statutory auditor of PQR Ltd. (the parent company) and all its subsidiaries, CA Ananya has a responsibility to express an opinion on the Consolidated Financial Statements (CFS) in accordance with the Standards on Auditing (SAs) and applicable accounting standards. The primary objective is to determine whether the CFS are prepared, in all material respects, in accordance with the applicable financial reporting framework. Responsibilities of CA Ananya as auditor of the CFS: Compliance with Accounting Standards: CA Ananya must ensure that the CFS are prepared in accordance with the applicable consolidation Accounting Standards (e.g., Ind AS 110, AS 21). The omission of required adjustments for a subsidiary constitutes a material departure from these principles. Materiality Assessment: Even though management claims the impact is limited and does not affect the overall presentation significantly, CA Ananya must independently evaluate the materiality and pervasiveness of this unadjusted misstatement. Materiality is judged in the context of the CFS as a whole. A misstatement related to consolidation principles, even if from a single subsidiary, can be material due to its nature or magnitude. Communication with Management and TCWG: CA Ananya has already brought the matter to management's attention and requested adjustments. If management refuses, she should communicate this uncorrected misstatement to those charged with governance (TCWG) and discuss the implications. Impact on Audit Opinion: The uncorrected material misstatement will directly impact the auditor's opinion on the CFS. CA Ananya cannot issue an unmodified opinion if there is a material misstatement that management refuses to correct. Course of Action for CA Ananya while framing her audit opinion: Given that management has refused to make the necessary adjustments, CA Ananya must apply the requirements of SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”. Evaluate Materiality and Pervasiveness: CA Ananya must carefully evaluate the materiality of the unadjusted consolidation adjustment. If the misstatement is material but not pervasive to the CFS, a qualified opinion would be appropriate. If the misstatement is both material and pervasive, an adverse opinion would be necessary. Qualified Opinion: If CA Ananya concludes that the unadjusted misstatement is material but not pervasive, she should express a qualified opinion . The auditor's report would include: A “Basis for Qualified Opinion” section, explaining the nature of the misstatement (i.e., the subsidiary's figures not being adjusted as required by consolidation accounting standards) and its financial effects. A statement that, except for the effects of the matter described in the Basis for Qualified Opinion section, the CFS present fairly, in all material respects, the financial position, financial performance, and cash flows of the group. Adverse Opinion: If CA Ananya concludes that the unadjusted misstatement is both material and pervasive to the CFS, she should express an adverse opinion . The auditor's report would include: A “Basis for Adverse Opinion” section, providing a clear description of the misstatement and its pervasive effects on the CFS. A statement that, because of the significance of the matter described in the Basis for Adverse Opinion section, the CFS do not present fairly, in all material respects, the financial position, financial performance, and cash flows of the group. Reporting on Consolidated Financial Statements: In her audit report, CA Ananya should clearly state whether principles and procedures for preparation and presentation of consolidated financial statements as laid down in the relevant accounting standards have been followed. In this case, she would highlight the departure. True and Fair View: Her opinion must address whether the consolidated financial statements give a true and fair view of the state of affairs of the Group as on the balance sheet date and of its consolidated profit or loss and cash flows for the period. The uncorrected misstatement will prevent her from stating that they give a true and fair view without modification. Conclusion: CA Ananya cannot ignore the material departure merely because it relates to a single subsidiary or because management deems it insignificant. Her professional judgment, guided by SA 705, must determine the appropriate modification to her audit opinion based on the materiality and pervasiveness of the uncorrected misstatement. She must clearly communicate the nature and impact of this departure to the users of the CFS through her modified audit report.