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CA Intermediate · Auditing and Ethics · Completion and Review

While auditing Kaveri Textiles Ltd for the year ended 31 March, the auditor, CA Rohan, has finished his substantive work and is about to sign the report on 20 May. On 10 May the company's management approved a large sales return of goods dispatched in March, which was not reflected in the draft financial statements. Which is the most appropriate step for the auditor concerning this matter?

The auditor should evaluate whether the post-year-end sales return is an adjusting event and request management to adjust the financial statements. Under SA 560, events up to the report date that give evidence of conditions at the balance sheet date require adjustment, so ignoring it is wrong.

  1. AIgnore it, as it relates to a transaction after the balance sheet date
  2. BEvaluate whether it is an adjusting event and ask management to adjust the financial statements if it provides evidence of conditions existing at the balance sheet dateCorrect
  3. CMention it only in the management representation letter and take no further action
  4. DWithdraw from the engagement immediately

Explanation

Events between the period end and the date of the auditor's report must be identified and evaluated under SA 560. A sales return approved after year end for goods dispatched in March gives evidence of conditions existing at the balance sheet date, so adjustment is expected. Ignoring it or relying on a representation letter alone would not give sufficient appropriate audit evidence.

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