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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Audit-related and assurance services

Orchid Ltd's financial statements are being reviewed under ISRE 2400 (Revised) by Marlow LLP. During the review, the practitioner notices that the inventory turnover has fallen sharply compared with last year, and management's explanation is vague. What is the most appropriate next step?

The practitioner should perform additional procedures, such as further enquiries, analytical work or corroboration, until they are satisfied about the unexplained inventory turnover. Under ISRE 2400, awareness of possible material misstatement requires further work, so a vague management explanation alone is insufficient evidence.

  1. AAccept management's explanation, because review procedures are limited to enquiry
  2. BPerform additional procedures, such as further enquiries or testing, to resolve the matter and obtain sufficient evidence for the limited assurance conclusionCorrect
  3. CImmediately withdraw from the engagement and report to the regulator
  4. DConvert the engagement to an audit without agreeing this with the client

Explanation

Where the practitioner becomes aware of matters that may cause the statements to be materially misstated, ISRE 2400 requires them to design and perform additional procedures to obtain limited assurance. Accepting a vague explanation would not give sufficient evidence. Withdrawal or unilateral conversion is not the first response.

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