CA Intermediate · Auditing and Ethics · Audit Evidence
In the audit of Anand Motors Ltd, the auditor sends external confirmation requests to 25 debtors. Management requests that the auditor not confirm the balance of one large debtor, Mehta Agencies (Rs 60 lakh), saying the debtor is in dispute and a request would harm business relations. The auditor cannot find the management's reasons valid. Under SA 505, what should the auditor do?
If the auditor finds management's refusal to allow confirmation unjustified, the auditor should seek evidence through alternative procedures, communicate with those charged with governance, and consider the implications for the audit opinion. A management representation alone or substituting another debtor is not an adequate response under SA 505.
- ADrop the request and rely on management's representation letter alone
- BPerform alternative audit procedures, and if the refusal is unjustified, communicate with those charged with governance and consider the effect on the audit opinionCorrect
- CConfirm the balance with Mehta Agencies after informing management but treat refusal as proof of misstatement
- DReplace the debtor with another debtor in the sample and ignore the exclusion
Explanation
SA 505 requires the auditor to ask why management refuses and to evaluate the validity. If the refusal is unreasonable and no sufficient evidence is available through alternative procedures, the auditor communicates with those charged with governance and determines the implications for the opinion. A representation letter cannot replace evidence, and replacing the item hides the issue.
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