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CA Intermediate · Auditing and Ethics · Completion and Review

While auditing Kaveri Textiles Ltd for FY 2025-26, the auditor of the company finds that after the end of the reporting period but before the date of the auditor's report, a major customer owing ₹2 crore was declared insolvent, and the debt was outstanding at the balance sheet date. Management has not adjusted the financial statements. What is the most appropriate audit response under SA 560 (Subsequent Events)?

The customer's insolvency confirms a receivable weakness that existed at the balance sheet date, so it is an adjusting event. The auditor should ask management to adjust the financial statements and, if management refuses, consider qualifying or adversely modifying the opinion under SA 560.

  1. ATreat it as a non-adjusting event and ask management only to disclose it in the notes
  2. BTreat it as an event providing evidence of conditions existing at the reporting date and request management to adjust the financial statements, failing which consider a modified opinionCorrect
  3. CIgnore it because it occurred after the balance sheet date
  4. DWait until the financial statements are issued and then ask for a revision of the report

Explanation

The insolvency of a customer after the year-end, where the debt existed at the balance sheet date, confirms the condition that existed on that date, so it is an adjusting event. SA 560 requires the auditor to ensure such events are properly reflected. If management refuses to adjust, the auditor considers a qualified or adverse opinion. Treating it as merely a disclosure item is wrong because the loss relates to a receivable already existing at the reporting date.

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