Skip to content

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

In the audit of Anand Steel Ltd for the year ended 31 March, the auditor notes that the company has granted a loan to a director's relative in the year. Subsequent testing shows the loan was recorded as 'advance to suppliers' in the ledger. The loan is material, and management says the classification is a minor matter. Which is the MOST appropriate audit response?

The auditor should treat the item as a material misclassification involving a related party, raise it with management and those charged with governance, and, if it is not corrected, modify the opinion as qualified or adverse depending on materiality and pervasiveness. A management letter mention alone is not sufficient.

  1. AIgnore it since the amount is within total current assets
  2. BTreat it as a misclassification and related party issue, discuss with those charged with governance, and if not corrected, consider a qualified or adverse opinion based on materiality and pervasivenessCorrect
  3. COnly mention it in the management letter, as audit opinion is unaffected by classification
  4. DReport it only to the Registrar of Companies without modifying the audit report

Explanation

Misdescribing a related party loan as supplier advances is a misstatement of classification and disclosure, and it may also indicate concealment, so related party and fraud risk must be considered. If management does not correct a material misstatement, SA 705 requires a qualified or adverse opinion depending on materiality and pervasiveness. A management letter alone or ignoring it is inadequate.

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