CA Intermediate · Auditing and Ethics · Audit Report
The auditor of Meridian Retail Ltd concludes that the financial statements contain a misstatement in the revenue recognised, which is material and pervasive. In addition, she was unable to obtain sufficient appropriate evidence on a few smaller balances, though she has already concluded she cannot be unqualified. Which is the correct opinion?
The auditor should express an adverse opinion. The revenue misstatement is both material and pervasive, which under SA 705 requires an adverse opinion, and the smaller evidence limitation should be described in the basis paragraph but does not turn it into a qualification or disclaimer.
- AQualified opinion, since the evidence limitation affects only a few balances
- BDisclaimer of opinion, because there is an evidence limitation
- CAdverse opinion, because the misstatement is material and pervasiveCorrect
- DUnmodified opinion with an Emphasis of Matter on revenue
Explanation
When the auditor concludes that misstatements, individually or in aggregate, are both material and pervasive, SA 705 requires an adverse opinion. The additional limited evidence limitation does not change this, since the auditor already has a basis to conclude the financial statements are not fairly presented, and she should describe all matters giving rise to the modification. A qualified opinion is wrong because the misstatement is pervasive. A disclaimer is used only when the possible effects of undetected misstatements are material and pervasive.
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