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

Rao & Co. issue an adverse opinion on the financial statements of Deccan Steels Ltd because inventory is grossly overstated. The Directors' Report, which is other information, quotes the overstated inventory figure and a profit that depends on it. What must the auditor do under SA 720 (Revised) in reporting on other information?

The auditor must consider the implications of the matter giving rise to the adverse opinion for the statement required under paragraph 22(e) of SA 720 (Revised). Since the Directors' Report repeats the overstated inventory and dependent profit, the other information is affected and cannot simply be disregarded.

  1. AConsider the implications of the matter giving rise to the modification of opinion for the statement required in paragraph 22(e), since the other information is affectedCorrect
  2. BDisregard the other information because the opinion is already adverse
  3. COmit the opinion section and report only on the other information
  4. DTreat the matter as a key audit matter only and make no statement on other information

Explanation

SA 720 (Revised) requires the auditor to consider the implications of the matter giving rise to a qualified or adverse opinion for the paragraph 22(e) statement. Here the Directors' Report quotes the overstated inventory and dependent profit, so the other information is affected and the implications are real. Disregarding it is wrong because the standard demands consideration.

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