Two Modifications and an Omitted Going-Concern Paragraph: Selecting the Right Opinion
Eastern Infra Engineering Limited (EIEL) is an unlisted public company with a 31 March 2026 year end. Two matters are unresolved as you draft the report.
First, on 18 April 2026 EIEL's lender recalled a ₹120 crore term loan and issued a recovery notice. Net worth has fallen from ₹145 crore to ₹18 crore, and current liabilities exceed current assets by ₹96 crore. Management's going-concern assessment rests entirely on a letter of intent dated 3 March 2026 from a state PSU for a ₹210 crore order; no contract, performance guarantee or advance has followed. Note 41 discloses the recall and the letter of intent but concludes that no material uncertainty exists. The board approved the financial statements on 20 May 2026; your report will be dated 12 June 2026.
Second, EIEL changed depreciation on plant from written-down value to straight line from 1 April 2025, reducing depreciation by ₹6.2 crore; reported PBT is ₹4.1 crore. No note discloses the change or its effect. Separately, the Oman joint operation (22% of revenue) is audited by a local firm that refused access to its working papers on a ₹14 crore receivable, and you could not obtain alternative evidence.
1. For each of the three matters, state whether it gives rise to a modification, of what type, and why. Then state the opinion you would express on the financial statements as a whole.
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(a) Depreciation change - qualified. A change in the method of depreciation is a change in accounting estimate under Ind AS 8, applied prospectively, and Ind AS 8 requires disclosure of the nature and amount of the change and its effect. The disclosure is missing, and without the change a PBT of ₹4.1 crore becomes a loss. The effect is material to results, PPE and reserves, but it is confined to a few captions and does not pervade the statements → qualified (SA 705).
(b) Oman scope limitation - qualified. SA 705 applies where the auditor is unable to obtain sufficient appropriate audit evidence. A ₹14 crore receivable - several times materiality - is material, but the doubt is confined to one joint operation representing 22% of revenue; it is not pervasive, so a qualified opinion, not a disclaimer.
(c) Going concern - adverse. Under SA 570, the recall makes the loan payable on demand, and the sole support is a non-binding letter of intent with no contract, no guarantee and no cash. On the evidence a material uncertainty exists. Adequate disclosure would require an explicit statement that a material uncertainty exists and that the financial statements do not include the adjustments that would result. Note 41 instead denies it, so the notes are misstated. SA 570 then requires a qualified or adverse opinion depending on pervasiveness. Because the matter affects the classification of ₹120 crore of borrowings and the basis on which the whole of the financial statements are prepared, it is pervasive within SA 705 → adverse.
Overall. Where multiple matters exist, the auditor considers their combined effect. The pervasive going-concern matter dominates, so the opinion on the financial statements as a whole is adverse, with one Basis for Adverse Opinion section covering all three matters and explaining the two that would, on their own, have produced a qualification.
2. Set out the order of sections in your report and what belongs in each, including where the going-concern material-uncertainty section goes and whether a Key Audit Matters section is required.
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Order of sections.
- Title and addressee (the members).
- Opinion - headed 'Adverse Opinion', stating that the financial statements do not give a true and fair view.
- Basis for Adverse Opinion - immediately after the opinion. Describe the going-concern conclusion, the depreciation non-disclosure (₹6.2 crore; a loss without it) and the Oman scope limitation (₹14 crore, 22% of revenue), with note references and the amounts.
- Material Uncertainty Related to Going Concern - SA 570 places this section immediately after the Basis for Opinion. It is used only where disclosure in the financial statements is adequate. If the board amends Note 41 to state the uncertainty, this section is inserted, the going-concern modification falls away, and the opinion reduces to qualified on the two remaining matters.
- Key Audit Matters - SA 701 is mandatory for listed entities. EIEL is an unlisted public company, so a KAM section is not required, though the auditor may include one if it aids understanding. If included, a matter that gives rise to a modification is not described as a KAM; it stays in the Basis section.
- Responsibilities of management, including the going-concern assessment, and of the auditor.
- Other reporting requirements - the Companies (Audit and Auditors) Rules 2014 format, the CARO 2020 annexure, and reporting under section 143(3)(i) on internal financial controls.
- Signature with UDIN, firm registration number, place and date.
Dating. The report cannot be dated before the date on which the financial statements are approved in their final form; if the board amends Note 41, the approval date moves and the report date moves with it.
3. The CFO asks you to drop the going-concern paragraph because Note 41 'already tells the reader everything'. How do you respond, and what do you do if the board refuses to amend the note?
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Refuse. The note is management's disclosure; the paragraph is the auditor's separate conclusion. SA 570 requires the auditor's report to contain a section headed 'Material Uncertainty Related to Going Concern' wherever the auditor concludes that a material uncertainty exists and disclosure is adequate. Where disclosure is inadequate, SA 570 requires a modification, and no note can substitute for it. Agreeing to the request would be a failure to report under section 143 and a breach of integrity and objectivity in the Code.
Substance. The going-concern conclusion must cover at least twelve months from the date of the financial statements. A recalled ₹120 crore loan, negative working capital of ₹96 crore and an unsigned letter of intent do not support an unqualified conclusion, and the auditor's scepticism must be documented - including what management did to test the PSU order (any correspondence, board minutes, sanction status).
Process. Raise it with management and the audit committee (SA 260), supply a specific draft of the disclosure required, and minute their response. If the board refuses, modify the opinion as set out above. Also check consistency with the directors' responsibility statement and the Board's report, and consider whether any other reporting obligation under section 143(3) is engaged. If the financial statements are later amended, re-evaluate the conclusion from the date of the amended approval. Do not disclose the position to the lender without the client's consent.