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

During the audit of Sundaram Pharma Ltd, the auditor selects a sample of trade receivables for external confirmation. Management requests that the auditor not confirm the balance of Hari Distributors, a large debtor, stating that the party is in dispute and confirmation would damage the relationship. What should the auditor do first?

The auditor should first inquire into management's reasons and gather evidence on whether they are valid and reasonable. If the refusal is justified, alternative procedures such as examining subsequent receipts and invoices are performed. Simply dropping the confirmation or withdrawing immediately is not the prescribed response under SA 505.

1. AAccept the request, since management knows its customers best, and drop the confirmation without further action
2. BInquire into management's reasons and seek audit evidence on their validity and reasonableness, then perform alternative procedures if the refusal is justifiedCorrect
3. CTreat the balance as fraudulently stated and withdraw from the engagement
4. DConfirm the balance with the debtor anyway without informing management or the governance body