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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Kaveri Agro Foods Ltd, a listed company, has appointed M/s Rao & Co. as statutory auditors. During the audit of FY 2024-25, the auditor finds that the company's year-end inventory of packaged spices lies at a third-party warehouse in Nashik and represents 40% of total assets. The auditor was appointed after the year-end, so could not attend the count. Which procedure is the most appropriate response to obtain sufficient appropriate audit evidence on the existence of this inventory?

The auditor should perform alternative procedures, such as a later test count rolled back to year-end and direct confirmation from the third-party warehouse. Management representations or receipts alone are insufficient, and a disclaimer is considered only if these procedures fail to give sufficient appropriate evidence.

  1. ARely solely on the management representation letter confirming the quantity
  2. BPerform or observe alternative procedures such as a test count on a later date with roll-back, and obtain direct confirmation from the warehouse keeperCorrect
  3. CReport a disclaimer of opinion immediately without any further procedures
  4. DAccept the warehouse receipts supplied by management as conclusive evidence

Explanation

Where the auditor could not attend the count at year-end, SA 501 requires alternative procedures, such as a later test count rolled back to the balance sheet date and third-party confirmation. A management representation alone is not sufficient evidence. A disclaimer is considered only if such procedures cannot give sufficient evidence.

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