CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements
Ranjan & Associates are auditing Tara Steels Ltd. A debtor, Bhavani Traders, owes ₹48 lakh, and management has not provided for it. The auditor learns after year-end, but before signing the report, that Bhavani Traders was declared insolvent by a court order, and the court's process was started on a date after the balance sheet date, but the debt was already doubtful at year-end. What is the most appropriate audit response?
The auditor should require management to adjust the financial statements and provide for the debt, because the insolvency confirms a condition that existed at the balance sheet date. If management refuses and the amount is material, the auditor must modify the opinion rather than merely emphasise the matter.
- AAsk management to provide for the loss in the current year's financial statements, since the insolvency evidence confirms conditions existing at the balance sheet date, and modify the opinion if management refuses and the amount is materialCorrect
- BIgnore the event as it occurred after the balance sheet date and report it only in next year's audit
- COnly add an Emphasis of Matter paragraph without asking for any adjustment
- DAsk management to disclose it as a contingent liability in the notes
Explanation
Insolvency of a debtor after the year-end that confirms the doubtful condition at the balance sheet date is an adjusting event. The provision must be made in the financial statements. If management refuses and the effect is material, a qualified or adverse opinion is required. An Emphasis of Matter does not substitute for a required adjustment, and a receivable loss is not a contingent liability.
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