CA Intermediate · Auditing and Ethics · Audit Evidence
The auditor of Kaveri Pharma Ltd receives a bank confirmation directly from the bank by post, but the envelope seems to have been opened and resealed, and the reply differs from the company's ledger by a small amount. Under SA 505 on external confirmations, what is the most appropriate response?
The auditor should investigate the doubt, obtain further evidence directly from the bank, and consider the effect on risk assessment, including fraud risk. A confirmation whose reliability is doubtful cannot be accepted blindly, nor can the auditor jump to a fraud conclusion without further procedures.
- AAccept the reply because it came from the bank and reconcile the difference using the company's bank reconciliation alone
- BDisregard the reply and rely only on the bank statement given by the management
- CTreat the reliability doubt as a matter to investigate, obtain further evidence directly from the bank, and evaluate the implications for the audit including possible fraud riskCorrect
- DReport the matter in the audit report immediately as a fraud
Explanation
SA 505 requires the auditor to obtain further audit evidence to resolve doubts about the reliability of a confirmation response and to consider the implications for risk assessment, including fraud risk. Merely accepting it, ignoring it, or concluding fraud without investigation are not appropriate. Reliance on management-provided documents alone is weaker evidence.
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