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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

While auditing Dhruv Pharma Ltd, the auditor wants to test the existence and valuation of a large trade receivable from a distributor who has not replied to two positive confirmation requests. Which is the most appropriate alternative procedure?

The auditor should perform alternative procedures, such as examining subsequent cash receipts and the related invoices and dispatch documents. Under SA 505, non-response to a positive confirmation is not evidence of agreement. A management representation alone is insufficient, and the auditor cannot adjust the books.

  1. ATreat the balance as correct since no disagreement was received
  2. BExamine subsequent cash receipts, and the underlying invoices and dispatch documents for that balanceCorrect
  3. CWrite off the balance in the books by auditor's adjustment
  4. DRely on management's representation letter alone

Explanation

Under SA 505, when no response to a positive confirmation is received, the auditor performs alternative procedures such as checking subsequent receipts and shipping documents. Silence is not treated as agreement for positive confirmations. The auditor cannot make adjustments to the books, and a representation alone is insufficient.

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