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

Case: Veda Steel Ltd reported profit before tax of ₹40 crore. During the audit, M/s Khanna & Co found that an invoice of ₹3.6 crore for goods dispatched after year-end was booked as March sales, and the debtors' balance of ₹6 crore from a single customer, Ganga Traders, is doubtful with no provision. The auditor set overall materiality at 5% of PBT (₹2 crore) and performance materiality at 75% of it. The cost of goods sold on the cut-off sale was ₹2.7 crore. Management refuses to correct either item. What is the most appropriate conclusion on the effect of the misstatements on profit and the audit report?

Profit is overstated by ₹6.9 crore: ₹0.9 crore from the cut-off sale net of its cost, and ₹6 crore from the unprovided doubtful debt. This far exceeds the ₹2 crore materiality, so the auditor should give a qualified or adverse opinion depending on pervasiveness, not an unmodified opinion.

  1. AProfit overstated by ₹0.9 crore from cut-off; the amount is below materiality so the opinion remains unmodified irrespective of the debtor issue
  2. BProfit overstated by ₹6.9 crore in total (₹0.9 crore plus ₹6 crore); this exceeds materiality and is material, so a qualified or adverse opinion is appropriate depending on pervasivenessCorrect
  3. CProfit overstated by ₹9.6 crore in total (₹3.6 crore plus ₹6 crore); the opinion must be a disclaimer
  4. DProfit overstated by ₹6.9 crore; as management has refused, the auditor should simply report it as an Emphasis of Matter paragraph with an unmodified opinion

Explanation

The cut-off error overstates profit by sale less cost: 3.6 minus 2.7 = ₹0.9 crore. The unprovided doubtful debt overstates profit by ₹6 crore. Total 6.9 crore exceeds the ₹2 crore materiality (about 17% of PBT). Uncorrected material misstatements require a modified opinion (SA 705); an Emphasis of Matter does not substitute for it. A disclaimer concerns inability to obtain evidence, not known misstatements.

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