Audit Reports

Question 1

As an auditor of XYZ Limited, in view of given circumstances, you are required to draft Adverse Opinion and basis for adverse opinion due to a Material Misstatement of the CFS.

• Audit of a complete set of CFS of a listed company (incorporated under the Companies Act, 2013) using a fair presentation framework. The audit is a group audit of an entity with subsidiaries (i.e., SA 600 applies).
• The CFS are prepared by management of the entity in accordance with the AS prescribed u/s 133 of the Companies Act, 2013 (a general purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for the CFS in SA 210.
• The CFS are materially misstated due to the non-consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the CFS. The effects of the misstatement on the CFS have not been determined because it was not practicable to do so (i.e., an adverse opinion is appropriate).
• The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and the provisions of the Companies Act, 2013.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty does not exist related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570 (Revised).
• SA 701 applies; however, the auditor has determined that there are no key audit matters other than the matter described in the Basis for Adverse Opinion section.
• Those responsible for oversight of the CFS differ from those responsible for the preparation of the CFS.
• In addition to the audit of the CFS, the auditor has other reporting responsibilities required under the Companies Act, 2013.

Answer 1

Adverse Opinion : We have audited the accompanying CFS of XYZ Company Limited (hereinafter referred to as the “Holding Company”) and its subsidiaries (the Holding Company and its subsidiaries together referred to as “the Group”), its associates and jointly controlled entities, which comprise the CBS as at March 31, 2XXX,the CSPL, (consolidated statement of changes in equity){where applicable} and the consolidated statement of cash flows for the year then ended, and notes to the CFS, including a summary of significant accounting policies(hereinafter referred to as the “CFS”).

In our opinion and to the best of our information and according to the explanations given to us, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying CFS do not give a true and fair view in conformity with the accounting principles generally accepted in India, of their consolidated state of affairs of the Group, its associates and jointly controlled entities, as at March 31, 20XX, of its consolidated profit/loss, (consolidated position of changes in equity) ){where applicable} and the consolidated cash flows for the year then ended.

Basis for Adverse Opinion
As explained in Note X, the Group has not consolidated subsidiary PQR Company that the Group acquired during 20XX because it has not yet been able to determine the fair values of certain of the subsidiary’s material assets and liabilities at the acquisition date. This investment is therefore accounted for on a cost basis. Under the accounting principles generally accepted in India, the Group should have consolidated this subsidiary and accounted for the acquisition based on provisional amounts. Had PQR Company been consolidated, many elements in the accompanying consolidated financial statements would have been materially affected. The effects on the CFS of the failure to consolidate have not been determined.

We conducted our audit in accordance with Standards on Auditing (SAs) specified under section143(10) of the Companies Act, 2013. Our responsibilities under those Standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group, its associates and jointly controlled entities, in accordance with the Code of Ethics and provisions of the Companies Act, 2013 that are relevant to our audit of the consolidated financial statements in India under the Companies Act, 2013, and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics and the requirements under the Companies act, 2013. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse opinion.

Question 2

In the financial year 2020-21 , Shreyansh Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company’s ability to continue as going concern. Due to such event it may not be
possible for the company to realize its assets or pay off the liabilities during the regular course of
its business. The financial statement and notes to the financial statements of the company do not
disclose this fact. What kind of opinion should the statutory auditor of Shreyansh Ltd. issue in such
circumstances and why? Also, draft the opinion and basis for opinion para for the same.

Answer 2

Type of Opinion to be expressed:
In the present case, there exists a material uncertainty that cast a significant doubt on the company’s ability to continue as going concern and the same is not disclosed in the FS of MSD Ltd.

As such, the FS of MSD Ltd. for the FY 2021-22 are materially misstated and the effect of the misstatement is so material and pervasive on the FS that giving only a qualified opinion will be insufficient and therefore the statutory auditor of MSD Ltd. should issue an adverse opinion.

The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as under:

Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion section of our report, the accompanying financial statements do not present fairly, the financial position of MSD Ltd. as at March 31, 2022, and of its financial performance and its cash flows for the year then ended in accordance with the AS issued by the ICAI.

Basis for Adverse Opinion
MSD Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity of the company. Due to such event it may not be possible for the company to realize its assets or pay off the liabilities during the regular course of its business. This situation indicates that a material
uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. The FS and notes to the financial statements of the company do not disclose this fact.