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CA Intermediate · Auditing and Ethics · Completion and Review

While completing the audit of Rohini Foods Ltd on 20 May, CA Iyer learns that a major customer, whose ₹80 lakh receivable was recorded as good at 31 March, was declared insolvent on 12 May due to conditions that already existed at the balance sheet date. The financial statements are not yet issued and the auditor's report is dated 25 May. What should the auditor do?

The auditor should ask management to adjust the financial statements, since the customer's insolvency confirms conditions existing at the balance sheet date. If management refuses and the effect is material, the auditor should modify the opinion under SA 560. Mere disclosure or inaction would be inappropriate.

  1. ATreat it as a non-adjusting event and merely disclose it in a note
  2. BDo nothing, since the event occurred after the year-end
  3. CRequest management to adjust the financial statements for the provision, as it provides evidence of conditions at the balance sheet date, and modify the opinion if management refuses and the effect is materialCorrect
  4. DWithdraw from the engagement and file a report with the NFRA

Explanation

Insolvency of a debtor after the year-end generally confirms a condition existing at the balance sheet date, so it is an adjusting event. Under SA 560, the auditor asks management to adjust, and if material and not adjusted, expresses a qualified or adverse opinion. Treating it as non-adjusting is incorrect because the condition existed at the reporting date.

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