Skip to content

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

While auditing Sundaram Auto Components Ltd, the auditor selects a sample of 60 items of property, plant and equipment from the fixed asset register and physically verifies them. She finds that 4 items shown in the register are not in the factory, and management says they were sold in the year but the register was not updated. Which is the most appropriate next step by the auditor?

The auditor should evaluate the differences as misstatements, extend testing to find their extent, verify the sale proceeds and profit or loss on disposal, and consider the effect on the register's reliability and internal control. Merely correcting four items or ignoring them as trivial is inadequate.

  1. ATreat the differences as trivial because they are fewer than 10% of the sample and take no further action
  2. BConclude directly that the whole register is false and issue an adverse opinion
  3. CEvaluate whether the differences are misstatements, extend testing to determine their extent, check sale proceeds and the profit or loss on disposal, and consider the effect on the reliability of the register and internal controlCorrect
  4. DAsk management to correct only those 4 items and finish the testing

Explanation

Exceptions found in a sample must be investigated for their nature and cause, and the auditor should project and extend the testing as needed. The auditor should also verify the disposal accounting (receipt of proceeds, gain or loss) and consider the control weakness in updating the register. Correcting only the four items ignores the possibility of more misstatements, and an automatic adverse opinion is premature.

Did you get it right without looking?

One question tells you little. A timed set on Audit of Items of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Audit of Items of Financial StatementsFree diagnostic mock

More Audit of Items of Financial Statements questions