Page 179 - CA Final PARAM Digital Book.

(ii) In respect of Inventories (which constitutes 38% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. The audit
team was unable to undertake the physical inventory count as such the value of inventory could not be
verified.

Under the above circumstances what kind of opinion should CA Bahubali give? Write the opinion
paragraph and basis of opinion paragraph to be included in the Independent Auditor’s Report.
Answer In the present case, CA Bahubali is unable to obtain sufficient and appropriate audit evidence with respect
to the following:

(i) The balance confirmation with respect to debtors amounting to ` 240 crore is not available. Further
there has been default in payment by the debtors and the provision so made is not adequate. The
audit team is also unable ascertain the carrying value of trade receivables.

(ii) With respect to 38% of the company’s inventory, neither the physical verification has been done
by the management nor are adequate inventory records maintained. The audit team is also unable
to undertake the physical inventory count as such the value of inventory could not be verified.

In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.

Thus, CA Bahubali should give a Disclaimer of Opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:

Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of Bharat Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on
these financial statements.

Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ` 240 crore.
Further, there have been defaults on the payment obligations by debtors on the due dates during the year
under audit. The Company has created a provision for doubtful debts to the tune of ` 40 crore during the
year under audit which is inadequate in the circumstances of the company. The carrying value of trade
receivables could not be ascertained.
Further, in respect of Inventories (which constitutes 38% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. We were
unable to undertake the physical inventory count and as such the value of inventory could not be verified.

QNO Drafting Adverse opinion. Old Course – (M19E, N23R)
119.200 TITANIUM CNO --Unique New Course – (SM23)
ALM Associates has been appointed as auditor of M/s Hary Ltd. which acquired 55% shares- in M/s Sam
Ltd. on 15th October 2018. During audit of Harry Ltd., the auditors found that the company have not
prepared consolidated financial statements because on the date of acquisition the fair value of certain
assets & liabilities has not been ascertained which is significant and are accounted for on estimated basis
only. Help ALM Associates in framing opinion paragraph of audit report.
Answer Opinion Paragraph of Audit Report:
In the instant case, M/s Hary Ltd. acquired 55% shares in M/s Sam Ltd. and the company did not prepare the
consolidated financial statements because on the date of acquisition the fair value of certain assets and
liabilities has not been ascertained. Therefore, accounting is done on estimate basis only which is not correct
as the financial statements are materially misstated due to non-consolidation of subsidiary. The material
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