CA Intermediate · Auditing and Ethics · Audit Evidence

In the audit of Ganga Steels Ltd, the auditor sent external confirmation requests to 40 debtors. Management asks the auditor not to confirm the balance of one large debtor, Rawat Traders, citing a dispute. The auditor cannot find a valid reason for the refusal. Which is the correct audit response under SA 505?

The auditor should enquire into management's reasons, evaluate the implications including fraud risk, and perform alternative procedures. Under SA 505, an unreasonable refusal to allow confirmation cannot simply be accepted or ignored, nor assumed to prove fraud. If no alternative evidence is possible, those charged with governance are informed and the opinion is considered.

1. AComply with the request, since management controls access to customers
2. BTreat the refusal as sufficient evidence that the balance is overstated and report fraud
3. CEnquire about the reasons, evaluate the implications including risk of fraud, and perform alternative audit procedures to obtain relevant and reliable evidenceCorrect
4. DDrop the debtor from the sample and confirm another debtor instead without further action