CH06P03-SA 705

MCQ--705.1

When does an auditor shall modify the opinion in the auditor’s report?

(CNO-SA701.040)

• a) When, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement

• b) When, unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement

• c) (a) and (b) both.

• d) Either (a) or (b)

MCQ--705.2

A Ltd. is a company in the business of buying and selling modern and contemporary Indian arts. Following are the assets (in millions) of the Company on 31 March 2017:

• Fixed assets: INR 10

• Investments: INR 20

• Loans and advances: INR 40

• Inventories: INR 400

• Trade receivables: INR 10

• Cash and cash equivalents: INR 20

The management has not obtained valuation of inventories as at 31 March 2017 from a valuation expert in artforms. The auditors could not perform alternate procedures for valuation of inventories. Therefore, auditors were not able to comment on the carrying value of inventories. However, the auditors were able to obtain sufficient appropriate audit evidence in respect of all other captions of financial statements. The auditors qualified their opinion in the auditor's report. What are your views on auditors qualifying their report?

(CNO-SA705.020)

• a) The auditors were able to obtain sufficient appropriate audit evidence in respect of all captions of financial statements other than inventories. The auditors may qualify their opinion in the auditor's report considering only one caption of the financial statements could be misstated.

• b) Total assets amount to Rs. 500 million, out of which, Rs. 400 million pertaining to inventories comprises of 80% of total assets. This signifies that the auditors are not able to obtain sufficient appropriate audit evidence on 80% of the assets. Hence, possible misstatement, if any, could be pervasive. Therefore, the auditors should issue adverse opinion.

• c) Total assets amount to Rs. 500 million, out of which, Rs. 400 million pertaining to inventories comprises of 80% of total assets. This signifies that the auditors are not able to obtain sufficient appropriate audit evidence on 80% of the assets. Hence, possible misstatement, if any, could be pervasive. Therefore, the auditors should disclaim their opinion.

• d) Inventory is considered to be an important component of the financial statements. This is one of the items wherein significant risk may exist from the audit’s perspective. Auditor should take cognizance of this fact and accordingly decide his opinion – qualified/ adverse/ disclaimer.

MCQ--705.3

AHKPL Ltd. is an unlisted company in the business of the real estate following Accounting Standards. The company recognizes revenue on the basis of percentage completion as per AS 7. The company has various residential and commercial projects at different locations for which separate profitability statements are prepared by the management. Profitability statements are based on estimated costs of the projects. While reviewing the profitability statements, statutory auditors observed that the profitability of the projects have been fluctuating significantly year on year and the prime reason for that is the change in the estimated costs. As per the auditors, frequent changes are made by the management in the estimated costs to increase the percentage completion and through which revenue and profit numbers are manipulated. The auditors are not satisfied with the profitability statements of two major projects which account for 50% of the total turnover of the company. Management tried to explain the auditors saying that the changes would happen because of the dynamics of the industry which have been changing significantly and are unfavourable to the industry as a whole. All of this is leading to changes in the estimated costs. How should the auditors deal with this matter?

(CNO-SA705.020)

• a) Management’s view seems reasonable. Estimated costs are only estimates which are subject to changes and hence the auditors should drop this matter.

• b) The auditors view seems reasonable and if the management does not agree, the auditors should issue qualified report.

• c) The auditors should consider the impact of the adjustment on the financial statements and if the impact is pervasive, the auditor should issue adverse opinion.

• d) The auditors should consider the impact of the adjustment on the financial statements and may take the adjustment to unadjusted entry in the management representation letter and basis that issue a clean report.

MCQ--705.5

OPP & Co LLP is the statutory auditor of ABBA Private Limited. The company has an annual turnover of INR1000 crores and profits of INR 250 crores. The company is planning to get listed next year. The company appointed OPP & CO LLP as new auditors to have a fresh look on their financial systems so that the financial reporting can be improved wherever required. During the course of audit, the auditors have been facing lot of challenges to obtain sufficient appropriate audit evidence and have discussed the same with the management. Now the auditors are determining the implications. Please suggest which one of the following should not be the implication in respect of this matter.

(CNO-SA705.040)

• a) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion.

• b) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall withdraw from the audit, where practicable and possible under applicable law or regulation.

• c) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall withdraw from the audit, where practicable and possible under applicable law or regulation. If withdrawal from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements.

• d) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall withdraw from the audit, where practicable and possible under applicable law or regulation. If withdrawal from the audit before issuing the auditor’s report is not practicable or possible, report the matter to the Registrar of Companies.

MCQ--705.6

SKJ Private Ltd has an annual turnover of INR 200 crores and profits of INR 25 crores. The company is engaged in the business of textiles and has fairly stable operations over the years. There has not been much growth in the company in the last few years despite the attempts of the management. Currently the management is more focused towards cost cutting and has been considering all the options to achieve that objective. The statutory auditors of the company have been auditing the financial statements for the last 3 years and have issued clean reports over these years. During the financial year ended 31 March 2021, management got a large project from a new customer which resulted in significant increase in the turnover of the company. However, the profitability of the company did not improve much because the margins in the contract were not high. The statutory auditors during the course of their audit of financial statements for the year ended 31 March 2021 (their fourth year of audit) did not agree with the revenue recognition criteria followed by the company. Since the matter was significant, lot of discussions/debates happened between the auditor and the management. But it was finally agreed that the auditors would qualify their audit report. Auditors wanted that the management should explain this matter in detail in the notes to accounts to the financial statement over which the auditors are qualifying the audit report. However, the management had a different view. Management said that if the auditor is qualifying his report then why should the management also highlight that matter in the financial statement and hence refused to include any note for the same. Because of this conflict, audit is not getting concluded. You are requested to give your view in respect of this matter so that the matter gets concluded.

(CNO-Unique)

• a) In the given situation, if the management does not agree to give a note in the financial statements then the auditor should not hold the audit report. However, in such a case, the auditor would need to give disclaimer of opinion in his report instead of qualification.

• b) The argument of the management seems correct. Auditor cannot do both the things i.e., to qualify and then also get that highlighted in the financial statements. That note would not be beneficial for the users of the financial statements.

• c) In case of such matters related to revenue recognition, it is always better to give detailed explanation in the notes to accounts to the financial statements. If the explanation is satisfactory then the auditor should also consider giving emphasis of matter instead of qualification.

• d) The requirement of the auditor is beneficial for the company because by giving an explanation of the matter, on which auditor has given a qualification, in the notes to accounts, the management would be able to explain their perspective/ point of view to the users of the financial statements. In that case, auditor while giving the qualification can give reference to the notes to accounts otherwise the entire matter would form part of the audit report. However, the auditor should not hold his report if the management does not want to give any explanation in the notes to accounts

MCQ--705.7

The auditor shall express _________ opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements

(CNO-SA705.020)

• a) Adverse

• b) Qualified

• c) Disclaimer of opinion

• d) clean

MCQ--705.8

Medivision Industries designs and manufactures spectacles. Medivision’s year end was 31 March 2018 and itsdraft financial statements show a profit before tax of Rs.60 lakh. The fieldwork stage for this audit has largely been completed but there are few outstanding issues. On 1 January 2018, Medivision began the commercial production of a new range of lightweight frames which have been proven to keep their shape regardless as to how roughly they are treated. Up to 31 December 2017,the company had correctly capitalised development costs of Rs.45 lakh relating to this project. The directors believe that the new frames will have a product life of three years. The financial statements show development costs at a carrying amount of Rs.45 lakh. Medivision's accounting policy states that it amortises intangible assets on a straight-line basis. The auditor's report for Medivision is due to be signed in the next week or so, and you have been unable to resolve a disagreement with the directors concerning the amortisation of the development costs. The directors have refused to include any amortisation on the basis that sales of the product have not yet commenced. Which of the following options correctly summarizes the impact on the auditor's report if the issue remains unresolved?

(CNO-SA705.020)

• a) The auditor to provide an ‘Unmodified opinion’, since the directors are correct not to include any amortization on the basis that sales of the product have not yet commenced.

• b) The auditor to provide an ‘Unmodified opinion’ with emphasis of matter paragraph about the amortization charge on the capitalized development costs.

• c) The auditor to provide a Modified opinion - Adverse opinion since having obtained sufficient appropriate evidence, concludes that the misstatement is both material and pervasive.

• d) The auditor to provide a Modified opinion – Qualified opinion due to material misstatement of not recording the amortization charge on the capitalized development costs, which is material but not pervasive.

MCQ--705.9

CA Kamal is the statutory auditor of Autocover Ltd. for the FY 2020-21. The company is engaged in the business of manufacture of car accessories. CA Kamal noticed that the inventories of the company amounting to Rs. 46 crores (equal to 25% of the total assets of the company) at the end of the year do not exist. Also, sales amounting to Rs. 33 crores (equal to 10% of the total sales during the year) have not actually occurred. CA Kamal noticed both the material discrepancies just before the finalisation of the audit report for the year ending 31.03.2021. CA. Kamal considers that the above misstatement would distort the true and fair view to a greater extent.What is correct course of action that CA Kamal should consider in such a situation?

(CNO-SA705.020)

• a) CA Kamal should consider withdrawing from the audit engagement or issuing a disclaimer of opinion for the FY 2020-21.

• b) CA Kamal should consider issuing an adverse opinion and mentioning both the material discrepancies in the basis for adverse opinion paragraph of the auditor’s report.

• c) CA Kamal should ask the management to explain both the discrepancies in the notes to accounts and he himself should highlight the matter in the Key Audit matter paragraph of the auditor’s report.

• d) CA Kamal should give a qualified opinion along with the specific mention of the matters in the Emphasis of matter paragraph in the auditor’s report along with appropriate disclosure in the notes to accounts to be made by the management of Autocover Ltd.

MCQ--705.10

While verifying the salary expense of employees, the auditor has been asked to rely on the values as per SAP software and some hard copy reports and documents as the HRMS package (source software) has become corrupt during the year and the management is not having any data backup. How should the auditor deal with this issue?

(CNO-Unique)

• a) The auditor should issue a disclaimer of opinion as records are destroyed and he is unable to obtain sufficient appropriate audit evidence.

• b) The auditor should perform alternative procedures to obtain sufficient and appropriate audit evidence before disclaiming the opinion.

• c) The auditor should issue an adverse opinion stating that it is deficiency in internal controls.

• d) The auditor can rely on the SAP data and there is no need for qualification of report.

MCQ--705.11

Moon Ltd. is a company engaged in the manufacture of iron and steel bars. VP & Associates are the statutory auditors of Moon Ltd. for the FY 2021-22. During the course of audit, CA Vikash, the engagement partner, found that the Company’s financing arrangements have expired, and the amount outstanding was payable on March 31, 2022.

The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact.What opinion should CA Vikash express in the case of Moon Ltd.?

(CNO-SA705.020)

• a) Unmodified opinion.

• b) Qualified opinion.

• c) Adverse opinion.

• d) Disclaimer of opinion.