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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

An auditor is auditing trade receivables of Bharat Pharma Ltd. Management refuses to let the auditor send positive confirmation requests to a major customer, a Rs 85 lakh debtor, stating that the customer is in a dispute and may react adversely. Under SA 505, what should the auditor do FIRST?

The auditor should first enquire about management's reasons for refusing, evaluate whether they are valid, assess the effect on the risk of material misstatement including fraud, and then perform alternative audit procedures. Modification of the opinion or withdrawal arises only if sufficient appropriate evidence still cannot be obtained.

  1. AAccept management's refusal and rely on subsequent receipts alone, without further enquiry
  2. BImmediately issue an adverse opinion
  3. CEnquire about management's reasons, evaluate their validity and consider implications for risk of material misstatement, then perform alternative proceduresCorrect
  4. DWithdraw from the engagement immediately without any other procedure

Explanation

SA 505 requires the auditor to ask why management refuses, evaluate the validity of the reasons, consider the effect on risks including fraud risk, and perform alternative procedures. If sufficient evidence cannot be obtained, a modified opinion or withdrawal may follow. Immediate adverse opinion or withdrawal is premature, and blind acceptance is wrong.

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