CA Final · Advanced Auditing, Assurance and Professional Ethics · Reporting
Mehta & Co audit Anand Retail Ltd and issued an adverse opinion because inventory was materially overstated. The Management Discussion in the annual report cites the inventory figure and a gross margin derived from it. Under SA 720 (Revised), what must the auditor do when preparing the other-information statement?
The auditor must consider the implications of the matter behind the adverse opinion for the other-information statement. Since the Management Discussion relies on the overstated inventory and the derived margin, the matter affects the other information, so SA 720 (Revised) does not allow it to be ignored.
- AIgnore the modification, as the opinion on the financial statements already covers it
- BConsider the implications of the matter giving rise to the modification for the statement required, since the other information includes the affected inventory figureCorrect
- CReplace the adverse opinion with a qualified opinion to align with the Management Discussion
- DIssue a separate opinion on the Management Discussion
Explanation
SA 720 (Revised) says that when the auditor expresses a qualified or adverse opinion, the auditor shall consider the implications of the matter for the other-information statement. Here the Management Discussion uses the overstated inventory and the margin derived from it, so the matter affects the other information and the auditor cannot just ignore it. The auditor does not issue a separate opinion on other information.
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