SA 705 – Modifications to the Opinion in the Independent Auditor’s Report Flashcards
After accepting the statutory audit of M/s All-in-All Ltd., a departmental store, you became aware of the fact that management of the company have imposed certain limitations on the scope of your assurance function which may adversely affect and result in your inability to obtain SAAE to discharge your responsibility required by the statute. Indicate the consequences and your response to the limitations imposed by the management on your scope.
Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a
Management-Imposed Limitation after the Auditor Has Accepted the Engagement: As per SA
705, Modification to the Opinion in the Independent Auditor’s Report”, if, after accepting the
engagement, the auditor becomes aware that management has imposed a limitation on the scope
of the audit that the auditor considers likely to result in the need to express a qualified opinion or
to disclaim an opinion on the financial statements, the auditor shall request that management
remove the limitation.
If management refuses to remove the prescribed limitation, the auditor shall communicate the
matter to those charged with governance, unless all of those charged with governance are involved
in managing the entity and determine whether it is possible to perform alternative procedures to
obtain sufficient appropriate audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
(i) 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;
or
(ii) 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:
1. Withdraw from the audit, where practicable and possible under applicable law or
regulation; or
2. If withdrawal from the audit before issuing the auditor’s report is not practicable or
possible, disclaim an opinion on the financial statements.
If the auditor withdraws as discussed above, before withdrawing, the auditor shall
communicate to those charged with governance any matters regarding misstatements
identified during the audit that would have given rise to a modification of the opinion.
Sambhav & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed
company, Moksh Ltd.
Figures of income and net-worth of five out of seven components of Moksh Ltd., which are its
unlisted subsidiaries, is tabulated below for the immediate preceding financial year along with the
consolidated amount: (Rs in crore)
Particulars Consolidated Component Component Component Component Component
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
Income 600 70 20 140 130 40
Net Worth 1,600 80 40 280 360 100
The remaining two components i.e., Component ‘F’ & Component ‘G’ of Moksh Ltd. were unaudited.
According to Mr. Sambhav, the engagement partner, Component ‘F’ is material to the consolidated
financial statements whereas Component ‘G’ is not material to consolidated financial statements
and this fact has also been discussed in writing with those charged with governance of Moksh Ltd.
What shall be the audit consideration in relation to reporting in case of unaudited components
of Moksh Ltd. by Sambhav & Co. and how Sambhav & Co. as a principal auditor shall report
in case of Component ‘F’ & Component ‘G’, respectively?
Generally, the financial statements of all components included in consolidated financial
statements should be audited or subjected to audit procedures in the context of a multi location
group audit. Such audits and audit procedures can be performed by the auditor
reporting on the consolidated financial statements or by the components’ auditor.
Where the financial statements of one or more components continue to remain unaudited, the
auditor reporting on the consolidated financial statements should consider unaudited
components in evaluating a possible modification to his report on the consolidated financial
statements. The evaluation is necessary because the auditor (or other auditors, as the case
may be) has not been able to obtain sufficient appropriate audit evidence in relation to such
consolidated amounts/balances. In such cases, the auditor should evaluate both qualitative
and quantitative factors on the possible effect of such amounts remaining unaudited when
reporting on the consolidated financial statements using the guidance provided in SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.
In the given situation, two out of seven components of Moksh Ltd. have remained unaudited
where Component ‘F’ is material and Component ‘G’ is not material to the consolidated
financial statements.
Thus, in case of Component ‘F’, the Principal Auditor needs to consider its impact on the
auditor’s opinion on the consolidated financial statements of the group, in terms of the
principles laid down in SA 705, Modifications to the Opinion in the Independent Auditor’s
Report. Whereas in case of Component ‘G’, the principal auditor should make appropriate
reporting under the “Other Matters” paragraph, pursuant to SA 706, Emphasis of Matter
Paragraphs and Other Matter Paragraphs, in the Independent Auditor’s Report.
