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CA Intermediate · Auditing and Ethics · Ethics and Terms of Audit Engagements

During the audit of Pioneer Pharma Ltd, auditor CA Vikram finds that management has deliberately overstated closing inventory. Management refuses to correct it and asks Vikram not to mention it, offering a higher fee for the next year if he agrees. Which response is correct under the Code of Ethics and the Companies Act, 2013?

CA Vikram should issue a modified (qualified or adverse) opinion on the overstated inventory and refuse the inducement. Integrity and objectivity under the Code of Ethics require this, and SA 705 requires modification for uncorrected material misstatement. Staying silent for a higher fee, or merely writing a management letter, would be wrong.

  1. AAccept the arrangement, since the next year's fee is a separate engagement
  2. BMention the matter only in the management letter and issue a clean report
  3. CResign immediately without any report, to avoid conflict
  4. DIssue a modified opinion in the audit report on the misstatement, and reject any inducement that threatens objectivityCorrect

Explanation

A material misstatement that management refuses to correct requires a qualified or adverse opinion under SA 705. Accepting an inducement in exchange for silence is an integrity and objectivity breach and a professional misconduct risk. A clean report with only a management letter would misrepresent the position, and resigning without reporting avoids the duty.

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