CA Intermediate · Auditing and Ethics · Audit Report
During the audit of Mehta Pharma Ltd, CA Sneha finds that the company's physical inventory count at year-end was not observed, and she could not satisfy herself by alternative procedures about inventory of Rs 4 crore. Total assets are Rs 400 crore and profit before tax is Rs 60 crore. Other areas are clean. Which is the most appropriate report?
A qualified opinion is appropriate. The auditor could not obtain sufficient appropriate evidence on inventory, but the possible effects are material and not pervasive. The basis for qualification paragraph must describe the limitation. An adverse opinion or disclaimer would be too severe, and a Key Audit Matter cannot substitute for modification.
- AAdverse opinion, because inventory is a material item
- BQualified opinion, with the basis for qualification stating the inability to obtain evidence on inventoryCorrect
- CDisclaimer of opinion, because the auditor could not observe the count
- DUnmodified opinion with a Key Audit Matter on inventory
Explanation
Inability to obtain sufficient appropriate evidence is a limitation on scope. At about 1% of assets and under 7% of profit before tax, the possible effect is material but not pervasive, so SA 705 (Revised) calls for a qualified opinion 'except for'. An adverse opinion applies to misstatements rather than scope limitations, and a disclaimer needs possible effects that are both material and pervasive. A Key Audit Matter cannot replace a required modification.
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