CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements
In auditing Narmada Infra Ltd, the auditor observes that the company has granted a loan of Rs 50 lakh to a firm in which a director's relative is a partner. The company's board minutes show no approval, and the loan is not disclosed as a related party transaction. From the perspective of audit of loans and related party items, what is the most appropriate audit response?
The auditor should evaluate the transaction against the Companies Act requirements and AS 18 disclosure, and consider the impact on the audit report, including any modified opinion and CARO reporting. Later repayment or merely adding an Emphasis of Matter does not remedy the missing approval and undisclosed related party transaction.
- AIgnore it, as loans given are an investing activity and not an audit concern
- BEvaluate compliance with the Companies Act and the applicable AS 18 disclosure requirements, and consider reporting implications including the auditor's report and CARO mattersCorrect
- CAsk the director to repay the loan before the audit report date and make no report
- DInclude only an Emphasis of Matter and take no view on compliance
Explanation
SA 550 requires the auditor to identify related party relationships and transactions and assess whether they are properly accounted for and disclosed. Lack of board approval and non-disclosure indicate non-compliance with the Companies Act and the disclosure requirement of AS 18. The auditor must consider the effect on the audit opinion and on reporting, including CARO. Repayment after the event does not cure the non-disclosure, and Emphasis of Matter does not replace a modified opinion for non-compliance.
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