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

An auditor wants to obtain external confirmation of balances from debtors of Himalaya Traders Ltd. Management requests that confirmations NOT be sent to a major debtor, citing a dispute with that customer. Under SA 505, what should the auditor do first?

The auditor should inquire into management's reasons for refusing confirmation and seek evidence about their validity. Under SA 505, if the refusal is unreasonable, the auditor considers the effect on risk assessment and performs alternative procedures, rather than simply complying or resigning immediately.

  1. AComply with the request since management controls the debtor relationships
  2. BInquire about the reasons and seek audit evidence on their validityCorrect
  3. CImmediately resign from the engagement
  4. DTreat the balance as correct and exclude it from testing

Explanation

SA 505 requires the auditor to ask why management wants to refuse, and evaluate the validity of reasons. If the refusal is unreasonable, the auditor performs alternative procedures and considers implications for the audit and possibly the opinion. Resigning at once or accepting the request without inquiry are both incorrect.

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