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CA Intermediate · Auditing and Ethics · Completion and Review

While auditing Kaveri Textiles Ltd for FY 2025-26, the auditor finds on 20 May 2026, before signing the report on 30 May 2026, that a major customer was declared insolvent on 10 April 2026 owing Rs 85 lakh, and the debt was fully included in receivables at 31 March 2026. The customer's financial difficulties existed at the balance sheet date. What is the correct audit response?

The insolvency is an adjusting event because it provides evidence of a condition existing at the balance sheet date. The auditor should ask management to provide for the receivable and, if management refuses, consider a qualified or adverse opinion under SA 560.

  1. ATreat it as an adjusting event and ask management to provide for the debt in the financial statements, failing which consider modifying the opinionCorrect
  2. BTreat it as a non-adjusting event and ask only for a note in the financial statements
  3. CIgnore it, since it occurred after the balance sheet date
  4. DReport it only in the next year's audit

Explanation

Events up to the date of the auditor's report that give evidence of conditions existing at the balance sheet date are adjusting events (SA 560). The insolvency confirms the debt's recoverability was impaired at 31 March 2026, so provision is needed. If management refuses, a qualified or adverse opinion is considered. Treating it as non-adjusting is wrong because the condition existed at year-end.

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