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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

While auditing Nilgiri Tea Estates Ltd, the auditor finds that the company has taken a long-term loan from a bank and given a charge on its factory. The balance confirmation from the bank shows an outstanding amount of ₹2.4 crore, but the books show ₹2.1 crore. Management says the difference is interest accrued and not yet booked. What is the most appropriate audit response?

The auditor should corroborate management's explanation with the loan sanction terms and bank loan statement. If ₹30 lakh of interest is indeed accrued but unrecorded, the auditor should ask management to book it, since liabilities and expenses would otherwise be understated.

  1. AAccept management's explanation orally and take no further action
  2. BObtain evidence of the interest computation from the sanction terms and loan statement, and if the interest is unrecorded, ask for an adjustmentCorrect
  3. CReport the difference only as an emphasis of matter without asking for adjustment
  4. DIgnore the difference as the bank confirmation is not binding

Explanation

A difference between a third party confirmation and the books must be reconciled with evidence, not an oral explanation. The auditor should verify the interest against the sanction letter and loan statement. If the interest is unrecorded, liabilities and expenses are understated and an adjustment is needed.

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