Page 122 - CA Final PARAM Digital Book.

SA 505 establishes requirements and provides guidance for performing external confirmation
procedures.

➢ Other Audit Procedures
Depending on the circumstances, for example where information is obtained that raises doubt about
the integrity and objectivity of the third party, the auditor may consider it appropriate to perform
other audit procedures instead of, or in addition to, confirmation with the third party. Examples of
other audit procedures include:
• Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts.
• Requesting confirmation from other parties when inventory has been pledged as collateral.
(Warehouse Owner)
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third
party’s internal control for ensuring that inventory is properly counted and adequately
safeguarded.
• Attending, or arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable.

QNO Direct Communication Without Informing Management New Course – (SM23)
60.055 TITANIUM CNO-- SA501.120
On reviewing legal expenses account of Zed Ltd., CA. Sunitha, auditor of company, finds that legal fees
amounting to ₹ 10 lac was paid to B. George, a reputed lawyer, during the year 2022- 23. On inquiry with
management regarding the purpose of such expenditure, evasive reply was received from management
stating that a lot of work is performed by the said lawyer on behalf of the company. However, no specific
details were provided.

She finds it proper to correspond directly with the lawyer. She obtains the address and mail id of the
lawyer from his professional services bill. She shoots off an inquiry letter asking for the nature and status
of litigation claims against the company on her letterhead.

Is her approach proper? Irrespective of the merits of the approach followed by her, what she is trying to
achieve by corresponding with lawyer of the company?
Answer SA 501 states that when audit procedures performed indicate that material litigation or claims may exist,
the auditor shall seek direct communication with the entity’s external legal counsel. The auditor shall do so
through a letter of inquiry prepared by management and sent by the auditor, requesting the entity’s external
legal counsel to communicate directly with the auditor.

Therefore, her approach in communicating with an external lawyer is wrong. She has to make management
aware of her intention to communicate directly with the lawyer. The letter of enquiry has to be prepared by
management and sent by her.

Her purpose in corresponding with the lawyer of the company is to identify litigation and claims involving
the entity which may give rise to a risk of material misstatement. It is due to the reason that litigation and
claims involving the entity may have a material effect on the financial statements and thus may be required
to be disclosed or accounted for in the financial statements.

Understanding methods used by management for determining Old Course -- (N20E)
QNO
60.060 segment information New Course – (SM23)
TITANIUM CNO--SA501.140/SA501.160
GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company for the year
ended 31.03.2020 is concerned with the presentation and disclosure of segment information included in
Company's Annual Report. GHK Associates want to ensure that methods adopted by management for
determining segment information have resulted in disclosure in accordance with the applicable financial
reporting framework. Guide GHK Associates with 'Examples of Matters' that may be relevant when

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