Page 186 - CA Final PARAM Digital Book.

Observation 1:
The management had disclosed in the financials that, during the year, one of the warehouses of the
Company was affected due to a major flood. As a result of the same, the Company had incurred some
losses. But the management was of the view that it was not material.

Observation 2:
Due to flood, few records maintained by the Company with respect to a particular transaction was
completely destroyed and there was no duplicate record maintained by the Company. However,
those details were not pervasive, but material.

You are required to advise, whether AKB Associates should report Observation 1 and 2 in its audit report?
If so, under which heading should it be reported?
Observation 1 –
Part I -- Relevant Standards & Laws
▪ SA 706, “Emphasis of Matter Paragraph & Other Matter Paragraph in the Independent Auditor’s
Report”
Part II -- Requirements of Relevant Standards & Laws
➢ As per SA 706, “Emphasis of Matter Paragraph & Other Matter Paragraph in the Independent Auditor’s
Report”, an Emphasis of Matter Paragraph refers to matter appropriately disclosed in the financials,
that in the auditor’s judgement is of such importance that it is fundamental to users’ understanding
of the financials.
Part III – Case Discussion
➢ The management had disclosed in the financials that, during the year, one of the warehouses of
the Company was affected due to a major flood. As a result of the same, the Company had
incurred some losses. But the management was of the view that it was not material.
Part IV – Conclusion
➢ Hence, in this case, the auditor shall report about the consequences of the flood which affected
the Company’s warehouse under Emphasis of Matter Paragraph.

Observation 2 –
Part I -- Relevant Standards & Laws
▪ SA 705, “Modification to Opinion in the Independent Auditor’s Report”,
Part II -- Requirements of Relevant Standards & Laws
➢ As per SA 705, “Modification to Opinion in the Independent Auditor’s Report”, where the auditor is
unable to obtain sufficient and appropriate audit evidence and where such mater is material but not
pervasive, the auditor shall issue a qualified opinion.
Part III – Case Discussion
➢ Due to flood, few records maintained by the Company with respect to a particular transaction was
completely destroyed and there was no duplicate record maintained by the Company. However, those
details were not pervasive, but material.
Part IV – Conclusion
➢ Thus, in the given situation, on account of flood few records pertaining to particular transactions
was completely destroyed and in the absence of duplicate records, the auditor was unable to
obtain sufficient and appropriate audit evidence and those details were material but not
pervasive. Therefore, in accordance with SA 705, the auditor is required to issue qualified
opinion.

QNO Case Study (EMP & OMP) New Course – (SM23)
122.060 TITANIUM CNO-- SA706.040 / SA706.060
In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some matters. The
statutory auditor wants to draw the user’s attention towards such matters, though his opinion is not
modified in respect of such matters. Draft the relevant paragraphs of the audit report for the following
matters:

i. The company has a plan to resume its construction activities with respect to one of its thermal power
projects, The activity of such power plant was suspended in the FY 2020-21. The thermal power
project comprises of the plant and equipment amounting to ₹ 5.95 crore and capital work in progress
of ₹ 147.50 crore.

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