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

During the audit of Sundaram Pharma Ltd for the year ended 31 March, the auditor selects a sample of trade receivables for external confirmation. Management requests that the auditor not send confirmation requests to one large customer, Dhanvantri Distributors, saying the account is under commercial dispute and a request may harm the relationship. What should the auditor do first?

The auditor should first ask management why confirmation is refused and obtain evidence on whether the reasons are valid and reasonable. If accepted, alternative procedures are performed. Under SA 505, the auditor cannot simply agree or jump to an adverse opinion without evaluating the refusal.

  1. AAgree to the request, as management knows the customer relationship best, and rely on subsequent receipts
  2. BInquire about management's reasons and seek audit evidence on their validity and reasonableness, then consider alternative procedures if the refusal is acceptedCorrect
  3. CSend the confirmation anyway without informing the Board and ignore the objection
  4. DImmediately issue an adverse opinion on the financial statements

Explanation

Under SA 505, if management refuses to allow a confirmation request, the auditor must inquire about the reasons and seek evidence of their validity and reasonableness. If the refusal is reasonable, the auditor performs alternative procedures. An adverse opinion or silent agreement is premature. If the refusal is unreasonable and alternatives cannot give evidence, communication with those charged with governance and modification of the opinion are considered.

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