Skip to content

CA Intermediate · Auditing and Ethics · Audit Report

Auditor of Meghdoot Pharma Ltd finds that inventory worth Rs 2 crore, being 4% of total assets and 8% of profit before tax, is overstated because obsolete stock was not written down. Management refuses to adjust. All other areas are fairly stated. Which opinion should the auditor express?

The auditor should express a qualified opinion. The inventory overstatement is material to profit but limited to one area, so it is not pervasive. SA 705 requires an 'except for' opinion in this case, while an adverse opinion is reserved for material misstatements that are pervasive.

  1. AUnmodified opinion with Emphasis of Matter
  2. BQualified opinion, because the misstatement is material but not pervasiveCorrect
  3. CAdverse opinion, because management refused to correct
  4. DDisclaimer of opinion, because evidence could not be obtained

Explanation

The misstatement is material (8% of profit) but confined to inventory, so it is not pervasive. Under SA 705 a material but not pervasive misstatement gives a qualified opinion ('except for'). Adverse would need pervasive effect; management's refusal alone does not make it pervasive.

Did you get it right without looking?

One question tells you little. A timed set on Audit Report shows your real accuracy, how long you take and where you lose marks.

Practise Audit ReportFree diagnostic mock

More Audit Report questions