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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

During the audit of Himalaya Steels Ltd, the auditor finds that the company has accounted for a land purchase of Rs 2 crore in the name of its managing director's relative, though the funds were paid by the company and the land is shown as the company's property. The title deed is not in the company's name. The amount is material. Which is the most appropriate audit response?

The auditor should obtain evidence of ownership, examine the related party and title implications, and report the matter, modifying the opinion if it remains unresolved and material. Payment from company funds does not establish title, and non-depreciation of land does not remove it from audit.

  1. AAccept the asset as recorded since payment was made from company funds
  2. BTreat the item as a related party matter only and ignore the title question
  3. CObtain evidence on ownership and rights, evaluate the related party and legal title issues, and report the matter, including under CARO if applicable, with a modified opinion if not resolvedCorrect
  4. DRemove the asset from the audit scope because land is not depreciated

Explanation

Rights and ownership is an assertion for property, plant and equipment. Payment from company funds does not prove title. The auditor should seek evidence of ownership, assess related party implications and report adverse title matters, including a modified opinion if the material issue remains unresolved, and the CARO title deed reporting where applicable.

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