Skip to content

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

In auditing Sagar Infra Ltd, the auditor finds that a plant costing Rs 80 lakh was acquired during the year. The invoice is in the name of a director's relative's firm, and the purchase was approved by the same director. Which is the most appropriate audit step regarding the purchase, in addition to vouching cost and title?

The auditor should evaluate it as a possible related party transaction, checking authorisation, disclosure and whether terms are at arm's length, along with vouching cost and title. A purchase involving a director's relative carries higher risk and cannot be treated as routine merely because an invoice exists.

  1. ATreat it as routine since the invoice is available and the plant is physically present
  2. BEvaluate whether it is a related party transaction, check approval and disclosure requirements, and obtain evidence about arm's length termsCorrect
  3. CIgnore the relationship because related party matters belong only to the Board
  4. DReduce the capitalised amount by 20% as a prudence measure

Explanation

SA 550 requires the auditor to identify related party relationships and transactions, assess whether they were properly authorised and disclosed, and examine evidence on pricing. The Companies Act also has approval and disclosure requirements. Treating it as routine ignores the risk, and an arbitrary 20% reduction has no basis.

Did you get it right without looking?

One question tells you little. A timed set on Audit of Items of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Audit of Items of Financial StatementsFree diagnostic mock

More Audit of Items of Financial Statements questions