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CA Intermediate · Auditing and Ethics · Completion and Review

Auditor CA Rohan is finalising the audit of Mehta Steels Ltd on 30 June. On 10 July, before he signs the report on 20 July, he learns that a major customer owing Rs 90 lakh was declared insolvent on 5 July, based on conditions that existed at the balance sheet date of 31 March. Management has not adjusted the books. Under SA 560, what is the correct response?

The auditor should discuss the matter with management and, if the financial statements are not adjusted, modify the opinion as qualified or adverse depending on pervasiveness. The customer's insolvency reflects conditions existing at the balance sheet date, so it is an adjusting event discovered before the report date under SA 560.

  1. ATreat it as a non-adjusting event and merely mention it in the Emphasis of Matter paragraph without any other action
  2. BIgnore it because the event occurred after 30 June, when his audit work was completed
  3. CDiscuss with management and, if the financial statements are not amended where required, express a qualified or adverse opinion as appropriateCorrect
  4. DAdd the event to the Other Matter paragraph and give an unmodified opinion

Explanation

Events up to the date of the auditor's report must be identified under SA 560. The insolvency provides evidence of conditions existing at the balance sheet date, so it is an adjusting event requiring a provision or write-off. If management does not amend the financial statements, the auditor must modify the opinion, qualified or adverse depending on pervasiveness. Mere emphasis is wrong because the misstatement remains uncorrected.

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