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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

CA Tanvi is the statutory auditor of Gomti Agro Ltd. The managing director asks her to also confirm in her report whether the company's decision to expand into a new product line is commercially wise. What is the correct audit response?

The auditor should decline to comment. The audit objective is to express an opinion on the financial statements, not to assess whether management's business decisions are commercially sound. The auditor examines the accounting treatment and disclosure of the expansion, but not the wisdom of the decision itself.

  1. AComment on the commercial wisdom, since the auditor must evaluate all management decisions
  2. BDecline, as the audit is about expressing an opinion on the financial statements and not on the commercial wisdom of management decisionsCorrect
  3. CComment only if the decision involves expenditure above the materiality level
  4. DComment only if the expansion is financed from borrowings

Explanation

The auditor's objective is an opinion on whether the financial statements are prepared in all material respects per the applicable framework. The auditor does not judge the commercial wisdom of business decisions, though the accounting and disclosure effects are audited. Options 2 and 3 wrongly tie such comment to size or financing.

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