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CA Intermediate · Auditing and Ethics · Audit of Banks

The statutory central auditors of Godavari Bank Ltd, a company, find that the bank has not made adequate provision on a pool of restructured advances and the shortfall is material but not pervasive. Management declines to adjust. Under the Standards on Auditing and the banking regulatory framework, what should the auditors do?

The auditors should issue a qualified opinion, describing the provision shortfall and quantifying its effect where practicable in the Basis for Qualified Opinion paragraph. The misstatement is material but not pervasive, so adverse opinion or disclaimer is inappropriate, and Emphasis of Matter cannot replace a modification.

  1. AIssue an unmodified opinion with an Emphasis of Matter paragraph, since the bank follows RBI directions
  2. BIssue a qualified opinion with the basis for qualification describing the shortfall and its effect where quantifiableCorrect
  3. CIssue an adverse opinion because the matter involves advances
  4. DDisclaim an opinion because management refused to adjust

Explanation

A material misstatement that is not pervasive leads to a qualified opinion under SA 705, with a Basis for Qualified Opinion paragraph describing and, where practicable, quantifying the effect. Emphasis of Matter cannot substitute for a modification when financial statements are materially misstated. An adverse opinion requires pervasive misstatement, and a disclaimer relates to inability to obtain evidence, not to a known misstatement.

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