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

Case: Sahyadri Agro Ltd sold goods of Rs 2 crore to a distributor on 28 March, the last week of its financial year. Delivery to the distributor happened on 6 April, though the invoice was raised on 28 March and revenue recognised in the same year. Profit before tax is Rs 12 crore. The auditor concludes that revenue is overstated by Rs 2 crore, that this is material, and that the effect is confined to revenue and receivables. Management refuses to correct it. What should be the audit opinion?

A qualified opinion is appropriate. The premature revenue is material, but it affects only revenue and receivables and so is not pervasive. SA 705 reserves adverse opinions for pervasive misstatements, and an Emphasis of Matter paragraph cannot replace a modified opinion.

  1. AUnmodified opinion with an Emphasis of Matter paragraph
  2. BQualified opinion, because the misstatement is material but not pervasiveCorrect
  3. CAdverse opinion, because any material misstatement requires it
  4. DDisclaimer of opinion, because management refused to correct it

Explanation

The misstatement is material (Rs 2 crore against PBT of Rs 12 crore) and confined to specific items, so it is not pervasive. SA 705 requires a qualified opinion (except for) in that case. Adverse would apply only if it were pervasive. An Emphasis of Matter cannot substitute for a modification.

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