Jinchandra & Co., Chartered Accountants, has been appointed statutory auditor of Gurudeva Ltd. for the F.Y. 2022-23. The audit team has…

CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · May 2024
Jinchandra & Co., Chartered Accountants, has been appointed statutory auditor of Gurudeva Ltd. for the F.Y. 2022-23. The audit team has completed the audit and is in the process of preparing the audit report. Management of the company has also prepared draft annual report. The audit in-charge was going through the draft annual report and observed that the company has included an item in its annual report indicating a downward trend in market prices of key commodities/raw material as compared to the previous year. However, the actual profit margin of the company as reported in financial statements has gone in the reverse direction. The Audit Manager discussed this issue with a partner of the firm who in reply said that auditors are not covered with such disclosures made by the management in its annual report, it being the responsibility of the management. Do you think that the partner is correct in his approach on this issue? Discuss with reference to the relevant Standard on Auditing the Auditor's duties with regard to reporting.

Suggested Answer and Working Notes:

Responding When the Auditor Concludes That a Material Misstatement of the Other Information Exists: As per SA 720, “The Auditor's Responsibility in Relation to Other Information”, descriptions of trends in market prices of key commodities or raw materials is an example of amounts or other Items that may be included in the other information. The auditor's discussion with management about a material inconsistency (or other information that appears to be materially misstated) may include requesting management to provide support for the basis of management's statements in the other information. Based on management's further information or explanations, the auditor may be satisfied that the other information is not materially misstated. For example, management explanations may indicate reasonable and sufficient grounds for valid differences of judgment. Auditor's duties with regard to reporting in the given case are given hereunder: As per SA 720, “The Auditor's Responsibility in Relation to Other Information", if the auditor concludes that a material misstatement of the other information exists, the auditor shall request management to correct the other information. If management: (i) Agrees to make the correction, the auditor shall determine that the correction has been made; or (ii) Refuses to make the correction, the auditor shall communicate the matter with those charged with governance and request that the correction be made. Contention of the partner of the firm that auditors are not concerned with such disclosures made by the management in its annual report, is incorrect.

Topics: Standard on Auditing (SA)

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