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CA Intermediate · Auditing and Ethics · Audit Evidence

While auditing Mehta Steels Ltd, the auditor finds that management's written representation about completeness of related party transactions conflicts with bank confirmations and board minutes that indicate undisclosed transactions with a director's relative. Management insists its representation is correct. What is the auditor's most appropriate response under the Standards on Auditing?

The auditor should perform further procedures to resolve the inconsistency, reconsider the reliability of management's representations, and assess the impact on the audit opinion. Under SA 580, written representations cannot replace other evidence and cannot override contradicting external or internal evidence.

  1. ARely on the written representation since it is signed by management and ignore the other evidence
  2. BTreat the inconsistency as requiring further audit procedures, reconsider the reliability of management representations, and evaluate the effect on the audit opinionCorrect
  3. CRemove the bank confirmations from the audit file because they contradict management
  4. DResign immediately without performing any further procedures

Explanation

SA 580 states representations are not a substitute for other evidence, and where they are inconsistent with other evidence, the auditor must investigate, reconsider reliability of representations and other evidence, and consider the effect on the opinion. Ignoring contrary evidence or removing documents is improper, and immediate resignation is not the required first step.

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