Raja & Co., Chartered Accountants, are the statutory auditors of Rani Ltd., a listed company, for the year ended 31 March 2026. The annual…
CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · November 2026
Raja & Co., Chartered Accountants, are the statutory auditors of Rani Ltd., a listed company, for the year ended 31 March 2026. The annual report of Rani Ltd. contains segment information relating to its various business segments. During the audit, the auditors observed that there were significant sales and transfers between segments and that certain common assets and costs had been allocated among the segments. They also noticed that the basis of allocation of certain costs differed from the previous year. The auditors intend to obtain an understanding of the methods used by the management in determining and presenting the segment information and to assess whether such methods are likely to result in disclosures in accordance with the applicable financial reporting framework. With reference to the relevant Standards on Auditing, explain the 'examples of matters' that the auditors should consider while obtaining an understanding of the methods used by management in determining and presenting segment information in the financial statements.
Suggested Answer and Working Notes:
SA 501, "Audit Evidence—Specific Considerations for Selected Items", requires the auditor to obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework. For this purpose, the auditor obtains an understanding of the methods used by management in determining segment information and considers whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework. The examples of matters that may be relevant in this regard include: Sales, transfers and charges between segments, and elimination of intersegment amounts. Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales. The allocation of assets and costs among segments. Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies. In the given case, Raja & Co. should accordingly examine the inter-segment transactions, basis of allocation of assets and costs, comparison of segment results with budgets or expected results, and consistency of the methods with prior periods, including the adequacy of disclosures for any changes. This would enable the auditors to assess whether the segment information has been determined and presented in accordance with the applicable financial reporting framework.
Topics: Standard on Auditing (SA), Audit Evidence
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