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CA Intermediate · Auditing and Ethics · Audit Evidence

During the audit of Himalaya Foods Ltd, the auditor wants to confirm balances of trade receivables through external confirmation. Management requests that the auditor not send confirmation to Sharma Traders, a large customer, citing an ongoing dispute. Under SA 505, what is the appropriate response of the auditor?

The auditor should ask management for its reasons and seek evidence on whether they are valid and reasonable. If the refusal is accepted, alternative audit procedures must be performed to obtain relevant and reliable evidence about the balance. The request cannot simply be accepted and the confirmation dropped.

  1. AAgree to the request and omit the confirmation without any further procedure
  2. BInquire into management's reasons and seek audit evidence on their validity and reasonableness; if accepted, perform alternative procedures to obtain evidenceCorrect
  3. CTreat the request as conclusive evidence of a material misstatement and issue an adverse opinion immediately
  4. DSend the confirmation through management so that the dispute can be resolved first

Explanation

Under SA 505, if management refuses permission, the auditor inquires about the reasons and evaluates their validity. If the refusal is reasonable, the auditor performs alternative audit procedures. Omitting confirmation without inquiry is wrong, and an immediate adverse opinion is premature.

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