CA Intermediate · Auditing and Ethics · Completion and Review

While auditing Kaveri Textiles Ltd, the auditor of the company completes substantive procedures in May and finds that, in the final analytical review, the ratio of gross profit to turnover has moved sharply from the previous year without any explanation from management. Under SA 520, what is the most appropriate response of the auditor?

The auditor should investigate the unexplained gross profit movement by inquiring of management and obtaining further audit evidence, then consider the effect on the opinion. Final analytical procedures are required under SA 520, and inconsistent relationships must be investigated before concluding, not ignored or met with an automatic adverse opinion.

1. AIgnore the movement because final analytical procedures are optional and only meant to confirm the financial statements
2. BInvestigate the unexpected relationship by inquiring of management and obtaining appropriate audit evidence, and consider the effect on the audit opinionCorrect
3. CImmediately issue an adverse opinion because an unexplained movement indicates material misstatement
4. DRecord the movement only in the management letter and not extend any audit procedures