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CA Intermediate · Auditing and Ethics · Completion and Review

CA Sharma is auditing Tapovan Steels Ltd. After the balance sheet date and before the report date, a fire destroys a warehouse holding inventory worth Rs 6 crore, which is material. The loss arose from an event occurring after the year end and does not relate to conditions at that date. Management has made no adjustment but has disclosed the nature of the event and estimated loss in the notes. What should the auditor do?

The event is non-adjusting because it arose after the balance sheet date, and management has disclosed it adequately. The auditor gives an unmodified opinion and may add an Emphasis of Matter paragraph drawing attention to the disclosure. Forcing an adjustment or modifying the opinion is not warranted.

  1. AInsist on adjusting the inventory in the year-end financial statements and qualify the opinion if refused
  2. BAccept the non-adjusting disclosure, and consider an Emphasis of Matter paragraph to draw attention to it, giving an unmodified opinionCorrect
  3. CIssue an adverse opinion because the loss is material
  4. DDisclaim the opinion because the event is unusual

Explanation

The fire is a non-adjusting event as it reflects conditions arising after the balance sheet date. Adequate disclosure is required, which management has made. The auditor may add an Emphasis of Matter paragraph referring to the disclosure while giving an unmodified opinion. Adjustment (option A) would be wrong as inventory existed at year end.

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