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

CA Neha is auditing Bharat Secure Finance Ltd, a non-banking finance company. During the audit she finds that several loans overdue for more than the prescribed period are still classified as standard assets and no provision is made. The effect is material but not pervasive. Her best response is to:

She should issue a qualified opinion. Misclassifying overdue loans and not making provisions is a material misstatement, but since it is not pervasive, SA 705 requires an 'except for' opinion with a Basis for Qualified Opinion paragraph describing and, where possible, quantifying the effect.

  1. AIssue an unmodified opinion, since asset classification is a regulatory matter outside the audit
  2. BIssue a qualified opinion, because material misstatement exists from non-compliance with prudential norms and the required provision, describing the effect in the Basis for Qualified Opinion paragraphCorrect
  3. CIssue an adverse opinion automatically, since NBFCs require an adverse report for any NPA error
  4. DWithdraw from the engagement immediately without reporting

Explanation

Misclassification and under-provisioning against prudential norms produce a material misstatement. Since it is material but not pervasive, SA 705 requires a qualified opinion (except for) with a basis paragraph quantifying the effect where practicable. An adverse opinion is for pervasive misstatements.

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