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

Case: Vishwa Infra Ltd, with a subsidiary Vishwa Roads Ltd audited by a different firm, is audited by CA Menon (group engagement partner). Component auditor's work on Vishwa Roads covers a significant component with a Rs 40 crore revenue. Tax note: the subsidiary has an unresolved Rs 9 crore GST demand, disclosed as contingent liability by the component, though the component auditor privately thinks an outflow is probable. Group materiality is Rs 3 crore and component materiality Rs 2 crore. The component auditor refuses to share its working papers, citing confidentiality. What should the group engagement partner do under SA 600 (Revised)? Which action is most appropriate?

The group engagement partner should discuss the probable-outflow concern with the component auditor, try to obtain sufficient appropriate evidence, including through alternative procedures, and if access remains denied treat it as a scope limitation that may lead to a modified opinion. Rs 9 crore exceeds group materiality, so it cannot be ignored.

  1. AAccept the component's disclosure since the amount is only a contingent liability
  2. BEvaluate whether sufficient appropriate evidence can be obtained, discuss the probable-outflow concern with the component auditor, and if access is still denied treat it as a scope limitation that may require a modified opinionCorrect
  3. CReduce group materiality to zero
  4. DResign without evaluating whether alternative procedures can be performed

Explanation

Rs 9 crore exceeds group materiality of Rs 3 crore, and probable outflow would require a provision under Ind AS 37 rather than mere disclosure. The group partner must be involved in the component auditor's work and obtain sufficient appropriate evidence. If this is not possible even after alternative procedures, it is a limitation of scope with modification implications. Accepting disclosure ignores the probability concern.

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