CA Intermediate · Auditing and Ethics · Completion and Review
During the audit of Sundaram Foods Ltd, the auditor is performing analytical procedures near the end of the audit under SA 520. The procedures reveal a fluctuation in gross margin from 24% to 31% that contradicts other relevant information and is not explained by management. What should the auditor do?
The auditor should investigate the unexplained gross margin fluctuation by asking management and obtaining appropriate audit evidence for its explanations, and perform further procedures if needed, as SA 520 requires for inconsistent or significantly different results in overall review analytical procedures.
- AAccept it as a normal business variation since analytical procedures are only indicative
- BInvestigate by inquiring of management and obtaining appropriate audit evidence, and perform other audit procedures as necessaryCorrect
- CReport it directly to the Registrar of Companies
- DIncrease materiality so that the fluctuation becomes trivial
Explanation
SA 520 requires that where analytical procedures identify fluctuations or relationships inconsistent with other relevant information or that differ significantly from expected values, the auditor investigates by inquiring of management, obtaining appropriate evidence for responses, and performing other procedures as needed. Raising materiality merely to avoid investigation is improper, and reporting to the ROC is not the first response.
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