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CA Intermediate · Auditing and Ethics · Audit Report

CA Nisha is the statutory auditor of Ganga Steels Ltd, which is listed. While finalising the report, she notes that the company's net worth is fully eroded and it has defaulted on bank loans; management has prepared accounts on a going concern basis, with adequate disclosure of the material uncertainty about going concern. Management's plans are, in her view, reasonable. What is the correct reporting response?

She should give an unmodified opinion and add a separate section headed Material Uncertainty Related to Going Concern that refers to the financial statement disclosure. Because the going concern basis is appropriate and disclosure is adequate, SA 570 (Revised) does not require a qualified, adverse or disclaimed opinion.

  1. AIssue an adverse opinion since going concern is inappropriate
  2. BIssue an unmodified opinion and include a separate section headed Material Uncertainty Related to Going ConcernCorrect
  3. CIssue a qualified opinion because net worth is eroded
  4. DDisclaim an opinion since future events cannot be predicted

Explanation

Under SA 570 (Revised), when adequate disclosure of a material uncertainty is made, the auditor expresses an unmodified opinion and includes a separate section titled 'Material Uncertainty Related to Going Concern' drawing attention to the disclosure. An adverse opinion applies if the going concern basis is inappropriate, and a qualified or adverse opinion applies if disclosure is inadequate. Here the basis is appropriate and the disclosure is adequate.

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