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

CA Tarun is auditing Sundaram Finance Services Ltd, an NBFC. Management has not made provision on a loan account where instalments are overdue for more than 120 days, arguing that the borrower is a long-standing client who will repay. The auditor is evaluating the audit response. Which is the most appropriate?

The auditor should check the loan's classification and provisioning against RBI prudential norms and, if the shortfall is material, modify the opinion because the statements are misstated. A long-standing relationship is no justification, and an emphasis of matter or deferral cannot replace a modified opinion.

  1. AAccept management's view because the client relationship is long-standing, and add an emphasis of matter paragraph
  2. BTest the asset classification and provisioning against the applicable RBI prudential norms, and if the shortfall is material, modify the opinion as the financial statements are misstatedCorrect
  3. CDefer the matter to the next year's audit because provisioning is an estimate
  4. DReport the matter only to the RBI and keep the audit report unmodified

Explanation

For an NBFC the auditor tests asset classification and provisioning against the RBI prudential norms. Relationship goodwill is not a basis for non-provision. If the shortfall is material, the financial statements are misstated and the auditor must express a qualified or adverse opinion depending on pervasiveness. An emphasis of matter cannot substitute for a modification of opinion for a misstatement.

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