CA Final · Advanced Auditing, Assurance and Professional Ethics · Audit Evidence
CA Priya audits Himalaya Agro Ltd. A positive confirmation from the company's sole large lender, covering a material loan, is judged necessary to obtain sufficient appropriate audit evidence. Despite reminders, no reply is received, and management says the bank statements it holds prove the loan balance. Which action is correct under SA 505?
The auditor must determine the implications for the audit and the opinion under SA 705 (Revised). Where a positive confirmation response is necessary, alternative procedures cannot provide the required evidence, so management-held statements do not replace it and an unmodified opinion cannot simply be issued.
- ATreat the bank statements held by management as an adequate alternative and issue an unmodified opinion
- BDetermine the implications for the audit and the auditor's opinion in accordance with SA 705 (Revised), as alternative procedures will not provide the required evidenceCorrect
- CPerform more inquiries of management and treat the matter as closed
- DObtain a larger sample of other loans to compensate for the missing confirmation
Explanation
Where a response to a positive confirmation is necessary for sufficient appropriate evidence, alternative procedures will not provide the evidence required. The auditor must determine the implications for the audit and opinion under SA 705 (Revised). Management-held statements are internal and cannot substitute. Obtaining more evidence of poor quality or from other items does not compensate for the missing evidence.
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