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CA Intermediate · Auditing and Ethics · Audit Report

Auditor of Himalaya Steels Ltd could not attend the physical verification of inventory at the year-end and could not apply alternative procedures. Inventory is 55% of total assets, and the possible effects are material and pervasive. In addition, the auditor has doubts on the going concern assumption but has not obtained evidence either way. Which is the most appropriate report?

The auditor should disclaim an opinion. SA 705 requires a disclaimer when the auditor cannot obtain sufficient appropriate audit evidence and the possible effects of undetected misstatements are both material and pervasive. Inventory forming 55% of assets makes the effect pervasive, so a qualified or adverse opinion is inappropriate.

  1. AQualified opinion due to limitation on scope
  2. BUnmodified opinion with a Material Uncertainty Related to Going Concern paragraph
  3. CAdverse opinion on the financial statements
  4. DDisclaimer of opinion because possible effects of undetected misstatements are both material and pervasiveCorrect

Explanation

Inability to obtain sufficient appropriate evidence whose possible effects are material and pervasive requires a disclaimer under SA 705. Inventory at 55% of assets makes the effect pervasive. A qualified opinion is for non-pervasive effects, and an adverse opinion needs a conclusion that misstatements exist, not just an inability to verify.

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