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

During the audit of Rohan Pharma Pvt Ltd, the auditor sends external confirmation requests to debtors. Management asks the auditor not to confirm the balance of Sunrise Distributors, a large debtor with a disputed ₹40 lakh balance, saying it would harm the business relationship. Under SA 505, what should the auditor do first?

The auditor should first inquire into management's reasons for refusal and gather evidence on whether they are valid. If the refusal is reasonable, alternative procedures are performed. If it is not, the auditor considers the effect on the audit and opinion under SA 505, not simply comply.

  1. AAgree to management's request and omit the confirmation without further inquiry
  2. BInquire into management's reasons and seek audit evidence on their validity, and perform alternative procedures if the refusal is acceptedCorrect
  3. CTreat the balance as fully uncollectible and write it off
  4. DIssue an adverse opinion immediately

Explanation

SA 505 requires the auditor to ask why management refuses and evaluate the validity of the reasons. If the refusal is reasonable, alternative procedures are performed. If unreasonable and evidence cannot be obtained otherwise, the auditor considers implications for the audit and opinion. An immediate adverse opinion or write-off is premature.

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