CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements
In the audit of Mehta Retail Ltd, the auditor discovers at the year end that the company has entered into several transactions with a firm owned by the managing director's brother, which were not disclosed to the auditor by management. These were identified from bank statements and board minutes. The auditor has determined that the firm is a related party under the applicable framework. Which response is most consistent with SA 550 and the Companies Act, 2013?
The auditor should inform the engagement team, ask management to identify all transactions with the newly found party, reassess the risk of other undisclosed related parties and evaluate audit implications, including why it was not disclosed. SA 550 requires this response; a representation letter or immediate resignation is not the prescribed step.
- ATreat it as a minor omission and rely on the management representation letter that all related parties were disclosed
- BPromptly communicate the newly identified related party to the engagement team, request management to identify all transactions with it, reassess the risk of other undisclosed related parties, and evaluate the implications for the audit including the circumstances of non-disclosureCorrect
- CDisclose the transactions in the audit report as a key audit matter without further procedures
- DResign immediately from the engagement because management has concealed information
Explanation
SA 550 requires that when the auditor identifies related parties management has not disclosed, the auditor communicates this promptly to the team, asks management to identify all transactions with them, inquires why controls failed to identify them, performs substantive procedures, reconsiders the risk of other undisclosed related parties and evaluates the implications for the audit, including management integrity. A representation letter cannot cure the failure. Resignation or a KAM-only response is premature.
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