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CA Final · Advanced Auditing, Assurance and Professional Ethics · Audit Evidence

Auditing Narmada Engineering Ltd, the auditor is concerned about a significant risk of material misstatement due to fraud in revenue and receivables. Management's accounting records and a management representation letter support the reported balances. Which approach best fits SA 500, SA 505 and the SAs referred to therein?

The auditor should obtain more persuasive evidence, giving greater emphasis to independent third-party evidence such as external confirmations to corroborate internal records and management representations. Higher assessed risk requires more persuasive evidence, and obtaining more evidence of poor quality does not compensate for its weakness.

  1. ARely on the accounting records and representation letter, because both are consistent with each other and no further evidence is required
  2. BReduce the quantity of evidence, because internally generated evidence is of high quality
  3. CObtain more persuasive evidence by placing more emphasis on evidence from third parties, such as external confirmations, to corroborate internal records and representationsCorrect
  4. DObtain a larger quantity of internal evidence, because more evidence compensates for poor quality

Explanation

Higher assessed risk calls for more persuasive evidence, which may be more relevant or reliable evidence, such as direct evidence from third parties. SA 500 says corroborating information from independent sources, like confirmations, may increase assurance from internal records or representations. Obtaining more evidence cannot compensate for poor quality, which rules out option D.

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