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CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities

CA Arvind is the statutory auditor of Lotus Finserv Ltd, a non-banking financial company. While auditing, he finds that the company has classified a loan as standard although instalments have remained overdue for well beyond the period after which the applicable prudential norms require it to be treated as non-performing. The provisioning shortfall is material. Which response is most appropriate?

The auditor should treat the shortfall as a material misstatement and modify the opinion, qualified or adverse depending on pervasiveness. Prudential norms on classification and provisioning affect the financial statements, so an unmodified opinion, a mere management letter, a disclaimer or withdrawal is not appropriate.

  1. AIssue an unmodified opinion and mention the matter in the management letter only
  2. BEvaluate the misstatement from non-compliance with prudential norms and express a qualified or adverse opinion based on materiality and pervasivenessCorrect
  3. CDisclaim the opinion since classification is a regulatory matter outside audit scope
  4. DWithdraw from the engagement as the entity is regulated

Explanation

Asset classification and provisioning under the regulator's norms affect the financial statements. A material shortfall is a misstatement, so the auditor modifies the opinion; qualified if material but not pervasive, adverse if pervasive. A management letter alone is inadequate, and a disclaimer applies only when evidence cannot be obtained, which is not the case here.

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