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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

Vikram & Associates audit Narmada Infra Ltd. The audit team obtained a bank confirmation showing a balance lower than the books and the finance manager explained it as cheques in transit. The team accepted the explanation without checking the bank reconciliation or later clearing. Another team member notes that the auditor should have exercised professional scepticism. Which is the most appropriate audit response?

The auditor should critically assess the explanation and corroborate it with independent evidence, such as examining the bank reconciliation and the subsequent clearing of the cheques. Professional scepticism requires a questioning mind, and management's oral explanation or a representation letter alone is not sufficient evidence.

  1. AAccept the explanation, since management is a reliable source and scepticism implies distrust of management
  2. BTreat the difference as immaterial without quantifying it
  3. CCritically assess the explanation, examine the bank reconciliation and subsequent bank clearing of the cheques, and corroborate with independent evidenceCorrect
  4. DAsk the finance manager to give a written representation and rely on it entirely as sufficient evidence

Explanation

Professional scepticism under SA 200 means a questioning mind and critical assessment of audit evidence. An oral explanation by management is weak evidence; the auditor should corroborate through reconciliation and subsequent clearing. A representation letter cannot replace other appropriate evidence, and materiality cannot be judged without quantifying.

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