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

Auditing trade receivables of Rathi Pharma Ltd, the auditor sends positive confirmation requests to 25 debtors. Five debtors do not reply even after a second request. Which is the most appropriate next step under SA 505 and SA 330?

The auditor should carry out alternative procedures on the non-responding debtors, such as checking subsequent receipts and delivery documents. Non-response does not prove misstatement, and ignoring the items or relying only on management representation would not give sufficient appropriate audit evidence.

  1. ATreat the non-responding balances as misstated and propose a full provision
  2. BPerform alternative procedures such as examining subsequent receipts and shipping documents for those balancesCorrect
  3. CDrop the five balances from the sample and extrapolate from the other 20
  4. DObtain a management representation that the balances are good

Explanation

When no reply is received to a positive confirmation, the auditor performs alternative procedures to obtain relevant and reliable evidence, such as checking subsequent cash receipts and dispatch documents. Automatically providing for them has no evidence basis. Dropping them biases the sample, and a representation alone is not sufficient evidence.

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