Audit Opinion with Misstatements, Going Concern and Scope Limitation
During the audit of Meridian Auto Components Ltd for the year ended 31 March 2024, the auditor notes the following. Trade receivables include ₹4.5 crore from a customer that filed an insolvency petition in April 2024; management has made no provision and says the customer's assets are adequate. The company has cash of ₹0.8 crore and current liabilities of ₹12 crore due within three months. A bank has sanctioned a ₹5 crore term loan, but it was not disbursed by the audit report date. Management refuses to give the board minutes for two meetings at which related-party transactions were approved, saying they are confidential. The auditor's cut-off testing found three sales invoices dated 31 March 2024, totaling ₹1.2 crore, for goods dispatched on 5 April 2024. The finance director argues that all these are timing issues and wants an unmodified audit report.
1. Classify each issue as a misstatement, a scope limitation, or a going-concern matter.
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Receivable ₹4.5 crore: potential misstatement due to no provision, or a scope limitation if management refuses to allow recoverability testing. Revenue cut-off ₹1.2 crore: misstatement because revenue was recognised before dispatch. Going concern: cash ₹0.8 crore against current liabilities ₹12 crore, with the sanctioned loan not disbursed, indicates a material uncertainty. Board minutes refusal: scope limitation, because the auditor cannot inspect evidence relevant to related-party approvals; it is not a misstatement unless the transactions themselves are wrong.
2. Recommend the appropriate audit opinion and any additional paragraphs under the SAs. Justify.
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Revenue cut-off and receivable provision are material misstatements; unless the auditor concludes they are pervasive, the opinion should be qualified under SA 705. If management refuses access to board minutes and no alternative evidence is available, that is an inability to obtain sufficient appropriate evidence; it also leads to a qualified opinion if material but not pervasive, and a disclaimer if pervasive. Going concern: if management's disclosures about the loan and liquidity are adequate, the auditor includes a 'Material Uncertainty Related to Going Concern' section under SA 570 and does not modify the opinion for that matter alone; if disclosures are inadequate, qualify or adverse. On the facts, a qualified opinion is likely, with a going-concern section if disclosures are adequate. An unmodified report is not appropriate.
3. What documentation and communication should the auditor prepare for the refusal to provide board minutes?
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Document the request, the refusal, the reasons given, alternatives attempted (for example, confirming related-party approvals from other records, resolutions or management representations), and the conclusion on materiality and pervasiveness. Communicate the matter to those charged with governance and consider legal advice. If the refusal prevents the auditor from obtaining evidence about the completeness of related-party disclosures, consider its effect on the audit opinion; do not automatically treat every refusal as fraud, but assess whether the matter needs reporting under the applicable legal framework. The audit file should show why the evidence obtained was or was not sufficient under SA 500 and SA 230.