CA Intermediate · Auditing and Ethics · Audit Evidence
During the audit of Orient Logistics Ltd, the auditor receives a bank confirmation which differs from the ledger balance. The company's accountant explains orally that the difference arises from cheques issued but not yet presented, and offers a reconciliation. The auditor also notices the reconciliation includes an unusually large unreconciled item. What is the most appropriate audit response?
The auditor should corroborate the reconciling items using subsequent bank statements and cheque clearances and investigate the large unreconciled item for possible error or fraud. Oral explanations are insufficient, and an external bank confirmation cannot be disregarded in favour of the company's own records.
- AAccept the accountant's oral explanation as sufficient since reconciling items are routine
- BTreat the matter as a misstatement of the full difference and request an adjustment without further work
- CTest the reconciling items by examining subsequent bank statements and cheque clearances, and investigate the unreconciled item, considering whether it indicates error or fraudCorrect
- DIgnore the confirmation and rely on the company's bank ledger
Explanation
Differences between a confirmation and the books must be investigated to determine whether they indicate misstatement (SA 505). Outstanding cheques can be verified from later clearances in subsequent statements, but a large unreconciled item needs inquiry and corroboration and may signal error or fraud. Oral explanations alone are inadequate, and ignoring external evidence is wrong.
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