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

CA Kiran is the auditor of Parivar Mutual Benefit Society, a non-profit entity. Subscriptions from members are recognised on a cash basis historically, but the entity's financial reporting framework requires accrual accounting. Subscriptions in arrears of ₹8 lakh at year end and advance subscriptions of ₹3 lakh received are not adjusted. The total income is ₹50 lakh and the surplus is ₹12 lakh. Management refuses to adjust. Which is the most appropriate audit response?

A qualified opinion is appropriate. Arrears of ₹8 lakh less advances of ₹3 lakh leave income understated by ₹5 lakh, about 42% of the ₹12 lakh surplus, which is material. It is confined to subscriptions and not pervasive, so adverse or disclaimer opinions are not warranted.

  1. AUnmodified opinion, since the net effect of ₹5 lakh is only a timing difference
  2. BQualified opinion, because the unadjusted net ₹5 lakh understatement of income (₹8 lakh less ₹3 lakh) is material to a ₹12 lakh surplus but not pervasiveCorrect
  3. CDisclaimer of opinion, because management refused to adjust
  4. DAdverse opinion, because accrual accounting is violated in one item

Explanation

Net understatement of income = 8 − 3 = ₹5 lakh, about 42% of the ₹12 lakh surplus, which is material. It affects specific items and is not pervasive, so a qualified opinion is correct. A disclaimer applies when evidence cannot be obtained, not when management declines to correct a known misstatement. Calling it a mere timing difference ignores that the framework requires accrual.

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