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

During the audit of Mahalaxmi Foods Pvt Ltd, the auditor selects a sample of trade receivables for external confirmation. Management requests that the auditor should not confirm the balance of Sharma Traders, a large debtor, saying the party is in a dispute with the company. What should the auditor do first?

The auditor should first enquire into management's reasons for refusing the confirmation and seek evidence on whether they are valid and reasonable. Depending on the outcome, alternative procedures are designed and risk implications evaluated. Simply substituting another debtor or jumping to an adverse opinion is not the correct first response.

  1. ADrop Sharma Traders from the sample and substitute another debtor without any enquiry
  2. BEnquire into management's reasons and seek audit evidence on their validity and reasonablenessCorrect
  3. CTreat the request as proof that the balance is misstated and issue an adverse opinion immediately
  4. DAccept the request and rely only on the subsequent cash receipt without considering anything else

Explanation

If management refuses to allow a confirmation request, the auditor must enquire about the reasons and seek evidence as to their validity and reasonableness. The auditor then evaluates implications for risk of misstatement and designs alternative procedures if the refusal is reasonable. Dropping the party at once ignores this, and an immediate adverse opinion is premature.

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