Skip to content

CA Intermediate · Auditing and Ethics · Audit Evidence

Auditor CA Rao is auditing Sundaram Foods Ltd. The company's receivables from a major customer, Bharat Retail, are material. Management requests that the auditor not send an external confirmation, saying the customer is in a dispute and may be upset. The auditor has no other basis to conclude that the request is valid. What is the correct response under SA 505?

The auditor should ask management for its reasons and evaluate their validity. If the refusal is unreasonable, the auditor must communicate with those charged with governance and perform alternative audit procedures. Simply accepting management's request or relying on its representation alone would not provide sufficient appropriate evidence under SA 505.

  1. AAccept the request and rely solely on management's representation about the balance
  2. BSeek an understanding of management's reasons and evidence of their validity; if unreasonable, communicate with those charged with governance and perform alternative proceduresCorrect
  3. CDrop the receivable from the audit scope as it is a disputed item
  4. DSend the confirmation after first telling the customer what balance to confirm

Explanation

Under SA 505, if management refuses to allow a confirmation request, the auditor inquires into the reasons and seeks audit evidence on their validity and reasonableness. If the refusal is unreasonable, or sufficient appropriate evidence cannot be obtained by alternative procedures, the auditor communicates with those charged with governance and considers the effect on the audit and opinion. Accepting the request blindly (A) is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Audit Evidence shows your real accuracy, how long you take and where you lose marks.

Practise Audit EvidenceFree diagnostic mock

More Audit Evidence questions