During the audit of Solstice Textiles Ltd., the auditor, while obtaining external confirmation of bank balances, received a confirmation directly…
CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · November 2026
During the audit of Solstice Textiles Ltd., the auditor, while obtaining external confirmation of bank balances, received a confirmation directly from the bank showing a Fixed Deposit of ₹ 2 crore in the name of the company. However, the Fixed Deposit was not recorded in the books of account of Solstice Textiles Ltd. and was also not appearing in the bank reconciliation statement prepared by the company. When questioned, the Finance Manager explained that the Fixed Deposit actually belonged to another group entity and that the group entity had inadvertently used Solstice Textiles Ltd.'s PAN while opening the account. He further stated that the Fixed Deposit had no impact on the financial statements of Solstice Textiles Ltd. The auditor is considering whether the management's explanation can be accepted without carrying out any further procedures. You are required to advise the auditor regarding the appropriate course of action in the above circumstances with reference to the relevant Standards on Auditing. Also state the related considerations that the auditor should evaluate before concluding on the matter.
Suggested Answer and Working Notes:
As per SA 505, “External Confirmations”, external confirmations generally provide reliable audit evidence. However, when a confirmation response indicates a difference between the information requested or contained in the entity's records and the information provided by the confirming party, the auditor is required to investigate the exception. In the given case, the bank has confirmed a Fixed Deposit of ₹2 crore in the name of Solstice Textiles Ltd., whereas the Fixed Deposit is neither recorded in the books nor reflected in the bank reconciliation statement. Accordingly, the auditor should not accept the Finance Manager's explanation merely on the basis of management representation. The auditor should perform appropriate additional procedures to resolve the matter, including: Obtaining confirmation from the bank regarding the account holder and ownership of the Fixed Deposit and examining the account-opening/KYC documents. Verifying whether the Fixed Deposit actually belongs to another group entity and determining why Solstice Textiles Ltd.'s PAN was used. Assessing whether the matter indicates an undisclosed related party or related party transaction, and considering the requirements of SA 550, Related Parties. Evaluating the completeness of Solstice Textiles Ltd.'s bank balances and other relevant financial information. Considering whether the unusual banking arrangement indicates any risk of fraud or management override, having regard to SA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements. The auditor should not rely on the management's uncorroborated explanation. If the matter remains unresolved after performing appropriate additional procedures, the auditor should evaluate its effect on the sufficiency and appropriateness of audit evidence and consider the implications for the auditor's report, including the requirements of SA 705, if applicable.
Topics: Standard on Auditing (SA)
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