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CA Intermediate · Auditing and Ethics · Completion and Review

During the audit of Himalaya Metals Ltd, CA Rohit, the auditor, completes the final analytical review and finds that the revenue-to-receivables relationship has changed significantly from earlier expectations. Management explains this by a change in credit terms, which Rohit finds plausible but no document supports it. The review is being done near the end of the audit. What is the appropriate response under SA 520 and SA 330?

The auditor should obtain appropriate evidence supporting management's explanation and perform further procedures if needed, then judge whether the overall conclusion still holds. Under SA 520 a plausible but unsupported explanation is not audit evidence, and a final analytical review must confirm that risk assessments remain appropriate.

  1. AAccept the explanation since it is plausible and the review is at the final stage
  2. BObtain appropriate audit evidence for management's explanation and evaluate whether the overall conclusion on the financial statements remains valid, performing further procedures if neededCorrect
  3. CDisclaim an opinion immediately because the explanation is undocumented
  4. DPass the issue to the next year's auditor as a matter for follow-up

Explanation

Under SA 520, where analytical procedures identify fluctuations inconsistent with other information, the auditor investigates by obtaining appropriate evidence for management's responses and performs other necessary procedures. Plausibility alone is not evidence. Final overall review should confirm the assessment of risks is still valid, so further work may be needed. Disclaimer is premature.

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