CA Intermediate · Auditing and Ethics · Audit of Banks
During the audit of Narmada Bank, the statutory auditor finds that the bank has not made adequate provision on NPAs as required by RBI norms, and the shortfall is material but not pervasive. The management refuses to adjust the financial statements. What should the auditor do in the audit report?
The auditor should issue a qualified opinion describing the provisioning shortfall and its effect, because the misstatement is material but not pervasive. An Emphasis of Matter paragraph cannot replace a modification, and adverse opinion or disclaimer would apply only to pervasive misstatement or inability to obtain evidence.
- AIssue an unmodified opinion and mention the shortfall in an Emphasis of Matter paragraph
- BIssue a qualified opinion, describing the shortfall and its effect, since the misstatement is material but not pervasiveCorrect
- CIssue an adverse opinion since any provisioning shortfall is pervasive
- DDisclaim an opinion because management refused to adjust
Explanation
Under SA 705, when a material misstatement exists that is not pervasive, a qualified opinion ('except for') is expressed. An Emphasis of Matter cannot substitute for a modified opinion. Adverse applies when the misstatement is both material and pervasive, and a disclaimer applies when evidence cannot be obtained, which is not the case here.
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