CA Intermediate · Auditing and Ethics · Audit Report

While auditing Kaveri Textiles Ltd, the auditor concludes that the financial statements are free from material misstatement, but the company's accounting for one minor item is slightly different from the auditor's preference and has no material effect. The auditor wants to draw attention to a matter already properly disclosed in Note 12 (a major fire at a plant after year-end) that is fundamental to users' understanding. Which is the correct way to report this in the audit report?

The auditor should give an unmodified opinion and add an Emphasis of Matter paragraph referring to Note 12. The fire is properly disclosed and fundamental to users' understanding, so SA 706 calls for emphasis, not a modified opinion, since the financial statements are not materially misstated.

1. AIssue a qualified opinion and describe the fire in the Basis for Qualified Opinion paragraph
2. BIssue an unmodified opinion and include an Emphasis of Matter paragraph referring to Note 12Correct
3. CIssue an adverse opinion because the event is fundamental to users
4. DInclude the fire in the Key Audit Matters section only and omit any other paragraph, as KAMs replace Emphasis of Matter