Three Unresolved Matters Before Signing
Meridian Instruments Ltd, a listed company, has turnover Rs 62 crore and profit before tax Rs 4.1 crore for the year ended 31 March 2025. The engagement team has set overall materiality at Rs 62 lakh and performance materiality at Rs 43 lakh. Three matters remain unresolved. First, the company changed its inventory valuation from FIFO to weighted average with effect from 1 April 2024; the change increased closing inventory and profit before tax by Rs 38 lakh. A note discloses the change but gives no restated comparatives and no quantification of its effect on the prior year. Second, a customer owing Rs 96 lakh has been in corporate insolvency resolution proceedings since January 2025; the company has recognised an expected credit loss of only Rs 12 lakh, relying on a director's verbal assurance from the resolution professional that 'something will be recovered'. Third, the finance director argues that the insolvency is a post-balance-sheet event because the resolution professional's report is dated 12 April 2025, and refuses any further provision. The audit partner must finalise the opinion within a week; the audit committee meets on 28 June.
1. Assess the inventory matter: is it a change of accounting policy, what treatment is required, and how should materiality be judged?
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A switch from FIFO to weighted average is a change in accounting policy, not a change in estimate, because it changes the basis of valuation rather than refining an input. The required treatment is retrospective: restate the opening balance of inventory and the comparative year, and disclose the nature of the change, the reason for it, and the quantified effect on each financial statement line affected and on earnings per share.
What has actually happened is a disclosure without restatement and without quantification - so the note describes the change but does not give users the information to undo it. The effect of Rs 38 lakh on profit before tax is the misstatement if comparatives are left unrestated.
On materiality, the arithmetic cuts both ways and must be done explicitly. Rs 38 lakh is 61 per cent of overall materiality and 88 per cent of performance materiality, so it is not clearly trivial; and it is 9.3 per cent of profit before tax of Rs 410 lakh, which is well above the 5 per cent profit-based benchmark many firms use. A change that lifts reported profit by nearly a tenth, in a year where the trend matters to a listed company's investors, has qualitative materiality even if it sits below overall materiality. It also cannot be judged in isolation: the uncorrected misstatements schedule must aggregate it with the receivables matter before any conclusion is drawn.
2. Evaluate the finance director's post-balance-sheet argument and quantify the likely misstatement on the receivable.
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The argument is wrong on its own facts. The test is not the date of a document but whether the condition existed at the reporting date. Insolvency proceedings commenced in January 2025, before 31 March 2025, so the customer's inability to pay was a condition existing at the balance sheet date. The resolution professional's report of 12 April 2025 is evidence about that existing condition, which makes it an adjusting event: the receivable must be measured at the year-end on the information available about the year-end condition.
The measurement standard requires an expected credit loss that is probability-weighted, forward-looking and based on reasonable and supportable information, including the insolvency process and expected recovery rates. A director's recollection of a verbal assurance from the resolution professional is not sufficient appropriate audit evidence: it is oral, uncorroborated, not in writing, and not attributed to a document the auditor can inspect. The auditor should seek the resolution professional's written report, the admitted claim status, the creditor committee minutes and any indicative recovery timeline.
Quantify: carrying amount Rs 96 lakh, provision Rs 12 lakh, so the unprovided exposure is Rs 84 lakh. That exceeds overall materiality of Rs 62 lakh on its own. A 12.5 per cent assumed recovery is in any case implausible for a company already in resolution, so the misstatement is more likely to be near the full Rs 96 lakh.
3. The finance director refuses to adjust either matter. What must the auditor do procedurally, and what opinion follows? Give the reasoning for the opinion type.
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Procedure. First, obtain written representations and place the disagreement on the schedule of uncorrected misstatements, aggregated: Rs 38 lakh plus Rs 84 lakh gives Rs 122 lakh, roughly twice overall materiality. Second, communicate the matter in writing to those charged with governance under the standard on communication with TCWG, setting out each item, its effect and the adjustment requested, in time for the 28 June audit committee. Third, consider whether the refusal, combined with the reliance on a verbal assurance, indicates a deficiency in the control environment that must be reported, and whether it affects the reliability of other representations (a scope-limitation risk if records are withheld). Fourth, document the conclusions and the effect on the audit report.
Opinion. The misstatements are material but not pervasive. They are confined to specific balances - inventory comparatives and trade receivables - and do not undermine the financial statements as a whole or render them misleading in their entirety; the going-concern and revenue figures are unaffected. The correct opinion is therefore a qualified ('except for') opinion, with a basis-for-qualified-opinion section quantifying each matter and the aggregate. A disclaimer would be appropriate only if the auditor could not obtain evidence at all; an adverse opinion only if the misstatements were both material and pervasive. Note the fallback: if the inventory restatement is eventually performed but the receivable is not, the remaining Rs 84 lakh still exceeds overall materiality, so the qualification stands.