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CA Intermediate · Auditing and Ethics · Completion and Review

CA Nisha is auditing Bharat Foods Ltd. After the balance sheet date but before the date of the auditor's report, a major customer went into insolvency, indicating that the trade receivable of Rs 40 lakh outstanding at year end was uncollectible. Management refuses to adjust the receivable, and the amount is material but not pervasive. What is the correct audit response under SA 560 and SA 705?

The auditor should issue a qualified opinion. The customer's insolvency provides evidence of a condition existing at the balance sheet date, so it is an adjusting event, and the unadjusted Rs 40 lakh is a material but not pervasive misstatement, which calls for a qualified opinion under SA 705.

  1. AIssue an unmodified report, since the event occurred after the balance sheet date
  2. BIssue a qualified opinion because of a material misstatement that is not pervasiveCorrect
  3. CIssue an adverse opinion because the amount is material
  4. DIssue a disclaimer of opinion because management refused the adjustment

Explanation

The insolvency provides evidence of conditions existing at the balance sheet date, so it is an adjusting event. Management's refusal to adjust leaves a material misstatement. Because the effect is material but not pervasive, SA 705 requires a qualified opinion (except for). An adverse opinion applies only when the effect is pervasive.

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