The management of a company to which AS-3. is not applicable does not include statement of cash flows in its annual report. The auditor should express

 Options:

a) Unqualified opinion b) Qualified opinion c) Adverse opinion d) Any of these depending upon materiality and pervasiveness and adequacy of disclosure

The Correct Answer Is:

a) Unqualified opinion

Correct Answer Explanation: a) Unqualified opinion

The given situation posits a company that is not subject to Accounting Standard 3 (AS-3). AS-3 pertains to the preparation and presentation of the Statement of Cash Flows.

In such a case, where AS-3 is not applicable to the company, the omission of the Statement of Cash Flows from the annual report doesn’t necessarily merit a qualified, adverse, or disclaimer of opinion from the auditor. Here’s why an unqualified opinion (option a) is the most suitable in this context:

An unqualified opinion signifies that the financial statements present a true and fair view in accordance with the applicable financial reporting framework. If AS-3 isn’t applicable to this particular company, the absence of the Statement of Cash Flows doesn’t directly impact the overall fairness of the financial statements.

Now, let’s explore why the other options are not the most appropriate:

b) Qualified opinion:

A qualified opinion is issued when the auditor believes that the financial statements are fairly presented except for specific matters where the company has not followed the prescribed accounting standards or when the auditor is unable to obtain sufficient appropriate audit evidence.

In this scenario, since AS-3 isn’t applicable to the company, the absence of the Statement of Cash Flows isn’t a deviation from the accounting standards applicable to it. Therefore, it doesn’t warrant a qualified opinion.

c) Adverse opinion:

An adverse opinion is given when the financial statements, taken as a whole, do not present a true and fair view of the company’s financial position and performance.

However, in this case, the omission of the Statement of Cash Flows, given that AS-3 is not applicable, does not inherently render the financial statements as misleading or inaccurate. Hence, issuing an adverse opinion would be unwarranted.

d) Any of these depending upon materiality and pervasiveness and adequacy of disclosure:

This option suggests that the auditor’s opinion could vary based on materiality, pervasiveness, and adequacy of disclosure. While these factors are critical considerations in auditing, the absence of the Statement of Cash Flows due to the inapplicability of AS-3 doesn’t automatically trigger a qualification or adverse opinion.

The absence of the Statement of Cash Flows, in this case, isn’t a deviation from the applicable accounting standards, thereby not warranting qualification or adverse opinion solely based on this omission.

In summary, an unqualified opinion is the most appropriate response because the absence of the Statement of Cash Flows in a scenario where AS-3 is not applicable does not inherently affect the overall fairness of the financial statements.

The key consideration remains whether the financial statements, as a whole, fairly represent the company’s financial position and performance, which is not compromised by the absence of the Statement of Cash Flows in this context.

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