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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 auditor. During the year the company sold goods worth Rs 40 lakh to a customer on 30 March with delivery terms 'ex-works, goods to be collected by buyer'. The goods were still in the company's warehouse on 31 March, though invoiced and recorded as revenue. The auditor wants evidence that is most reliable on whether control had transferred. Which audit evidence is generally the MOST reliable here?

Direct written confirmation from the buyer is the most reliable evidence, because it comes from an independent external source straight to the auditor and is documentary. Oral management representations, internal summaries and photocopied invoices are internally generated or weaker, so they carry less assurance on transfer of control.

  1. AOral explanation from the sales manager that the buyer owns the goods
  2. BAn internally prepared dispatch summary prepared by the accounts department
  3. CPhotocopy of the invoice retained in the sales file
  4. DWritten confirmation obtained directly by the auditor from the buyer about the terms and ownership of the goodsCorrect

Explanation

Audit evidence is more reliable when obtained from independent external sources directly by the auditor and in documentary form. A direct confirmation from the buyer meets this. Oral statements, internal summaries and photocopies are internally generated or less reliable.

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