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CA Intermediate · Auditing and Ethics · Ethics and Terms of Audit Engagements

Before accepting the audit of Sundaram Pharma Ltd, the auditor finds that management insists the audit engagement letter should limit the auditor's work so that confirmation of trade receivables by external parties is not permitted, though receivables are material. Management gives no valid reason. What is the most appropriate response under SA 210 and SA 705?

The auditor should not accept the engagement as a statutory audit. Under SA 210, when management imposes a scope limitation that would lead to a disclaimer of opinion, the auditor must decline, because an emphasis of matter or an unmodified opinion cannot correct such a material limitation.

  1. AAccept the engagement and issue an unmodified opinion since the engagement letter was signed
  2. BAccept the limitation and add an emphasis of matter paragraph after the audit
  3. CNot accept the engagement as a statutory audit where the limitation would lead to a disclaimer of opinion, since law requires an audit opinionCorrect
  4. DAccept and ask the audit committee to substitute management's own confirmation

Explanation

SA 210 states that if management imposes a limitation on scope that would result in a disclaimer of opinion, the auditor should not accept such an engagement as a statutory audit. Emphasis of matter cannot cure a material scope limitation. Accepting and issuing an unmodified opinion would be wrong, and management confirmation is not a substitute for audit evidence.

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