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CA Final · Advanced Auditing, Assurance and Professional Ethics · Reporting

Ganga Logistics Ltd.'s auditor has expressed an adverse opinion under SA 705 (Revised) because inventory was materially overstated. The Annual Report's Management Discussion section cites inventory-based profit figures. How should the auditor proceed under SA 720 (Revised) regarding the statement on other information?

The auditor must consider the implications of the matter giving rise to the adverse opinion for the statement on other information. Because the management discussion uses profit figures based on the overstated inventory, the other information is likely affected, so the auditor cannot ignore the modification.

  1. AIgnore the modification because it concerns only the financial statements
  2. BReplace the adverse opinion with a qualified opinion
  3. CConsider the implications of the matter giving rise to the modification for the statement on other informationCorrect
  4. DLeave the statement unchanged because other information is management's responsibility

Explanation

SA 720 (Revised) requires the auditor, on expressing a qualified or adverse opinion, to consider the implications of the modification matter for the other-information statement. Here the management discussion relies on the overstated inventory figures, so the other information is likely affected. Ignoring the modification is wrong as the standard requires explicit consideration.

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