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

While auditing Ganga Pharma Ltd, the auditor finds that the company has a trade receivable of Rs 12 lakh from a customer who has not responded to any reminders for 18 months. Management refuses to make any provision, saying the customer is a long-standing client. The amount is material. What is the most appropriate audit response?

The auditor should treat the unprovided doubtful debt as a material misstatement and, if management refuses to adjust, consider a modified opinion under SA 705. Long-standing relationship is not evidence of recoverability, and 18 months of silence indicates the receivable is likely impaired.

  1. AAccept management's view because the customer is long-standing
  2. BTreat the matter as a misstatement and, if management does not provide for it, consider a modified opinionCorrect
  3. CConfirm the balance again and, if unanswered, remove the debtor from the audit sample
  4. DReport the matter only to the Registrar of Companies

Explanation

Evidence suggests the receivable may not be recoverable, so an allowance is needed. An unadjusted material misstatement leads the auditor to modify the opinion (qualified or adverse depending on pervasiveness) under SA 705. Relationship history is not audit evidence of recoverability, and the reporting is to members through the audit report.

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