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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Kaveri Agro Foods Ltd's FY 2024-25 profit before tax is Rs 12 crore. The management has not provided for a customer claim of Rs 2.5 crore that arose from a product recall in February 2025, arguing it is uncertain. Legal counsel's letter says an adverse outcome is probable and the amount is reliably estimable. Overall materiality is Rs 1.2 crore. The auditor's disagreement is material but not pervasive, and no other issue exists. Which report is appropriate, and which accounting basis supports it?

A qualified opinion is appropriate. Ind AS 37 requires a provision for a probable, reliably estimable outflow, so omitting Rs 2.5 crore is a material misstatement. Since it exceeds materiality but is isolated and not pervasive, SA 705 calls for an except-for qualification, not an adverse opinion or disclaimer.

  1. AUnmodified opinion, since uncertain claims need only be disclosed
  2. BQualified opinion, because under Ind AS 37 a provision should be recognised for a probable and reliably estimable outflowCorrect
  3. CAdverse opinion, because the amount exceeds materiality
  4. DDisclaimer of opinion, because the outcome is uncertain

Explanation

Ind AS 37 requires a provision when an outflow is probable and reliably estimable, so non-recognition is a misstatement. Rs 2.5 crore exceeds materiality of Rs 1.2 crore (about 21% of PBT), hence material, but being isolated it is not pervasive. SA 705 therefore requires a qualified opinion (except for). An adverse opinion is for pervasive misstatements.

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