CA Intermediate · Auditing and Ethics · Audit Report
Auditor of Ganga Pharma Ltd, an unlisted company, concludes that inventory of Rs 4 crore, which is 3% of total assets and 12% of profit before tax, is overstated by Rs 60 lakh because of obsolete items. Management refuses to adjust. The auditor judges the misstatement material but not pervasive. Which is the correct opinion?
The auditor should issue a qualified opinion with a Basis for Qualified Opinion paragraph. The inventory overstatement is material but not pervasive, which under SA 705 calls for an 'except for' opinion. Adverse requires pervasiveness and disclaimer requires inability to obtain evidence.
- AUnmodified opinion with an Emphasis of Matter paragraph
- BQualified opinion, with a 'Basis for Qualified Opinion' paragraphCorrect
- CAdverse opinion, since management refused to adjust
- DDisclaimer of opinion, because the auditor could not obtain evidence
Explanation
A material misstatement that is not pervasive leads to a qualified opinion under SA 705 ('except for'). Refusal by management does not make it pervasive. An adverse opinion needs pervasiveness, and a disclaimer relates to inability to obtain evidence, which is not the case here.
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