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CS Professional · Compliance Management, Audit and Due Diligence · Audit Principles and Techniques

The management of Narmada Pharma Ltd argues that because the applicable financial reporting framework has no specific rule for a new type of transaction, the auditor cannot challenge how it was accounted for. According to SA 200, what is the correct view?

The management's argument is incorrect. SA 200 states that a framework may not specify treatment for every transaction, but it ordinarily contains sufficient broad principles on which accounting policies consistent with the framework's concepts can be developed and applied.

  1. ACorrect, because the framework must specify every transaction
  2. BIncorrect, because the framework ordinarily embodies sufficient broad principles to serve as a basis for developing accounting policies consistent with its conceptsCorrect
  3. CCorrect, because accounting policy is solely management's choice without any reference to the framework
  4. DIncorrect, because the auditor must then prepare the financial statements himself

Explanation

SA 200 notes that although the framework may not specify how to account for or disclose all transactions, it ordinarily embodies broad principles that support policies consistent with its concepts. So the absence of a specific rule does not free management from the framework. The auditor does not prepare the statements.

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