CA Z, the auditor of Prime Tech Industries Ltd., is conducting the audit for the financial year 2024-25. While reviewing contingent liabilities, he…
CA Intermediate · Auditing and Ethics · PYQS · January 2026
CA Z, the auditor of Prime Tech Industries Ltd., is conducting the audit for the financial year 2024-25. While reviewing contingent liabilities, he identifies significant litigations and legal claims that may materially affect the financial statements. The management's explanation regarding the progress and possible outcomes of these cases are inadequate and unconvincing. Anticipating that the company's external legal counsel may not respond to a general letter of enquiry. CA Z decides to seek direct communication through a letter of specific inquiry requesting the legal counsel to provide information to the auditor. You are required to state the matters to be included in such a letter of specific enquiry as per SA 501. (3 Marks) Further, explain the auditor's responsibility if the management refuses to permit communication or meeting with the entity's external legal counsel. (1 Mark)
Suggested Answer and Working Notes:
As SA 501 - "Audit Evidence-Specific Considerations for Selected Items", a letter of specific inquiry includes: list of litigation and claims;Where available, management's assessment of the outcome of each of the identified litigation and claims and its estimate of the financial implications, including costs involved; andA request that the entity's external legal counsel confirm the reasonableness of management's assessments and provide the auditor with further information if the list is considered by the entity's external legal counsel to be incomplete or incorrect. Auditor's responsibility where management refuses permission: If management refuses to permit the auditor to communicate or meet with the entity's external legal counsel, and the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, the auditor shall modify the opinion in the auditor's report in accordance with SA 705.
Topics: Audit Evidence
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