Page 115 - CA Inter Audit PARAM

CA Ravi Taori

➢ The nature of internal control related to inventories at different locations. It is possible that
inventories at one location have unsatisfactory control leading to higher risk of material
misstatement related to inventories at that particular location.

QNO Identification of risk of MMST for pending Old course -- (SM21/M19E/M20M/M21M/M22R)
501.11 litigation and claims Bhaskar CNO SA501.140
Pride India Ltd is a manufacturer of various FMCG (fast moving consumable goods) range of products. The
company is having several cases of litigation pending in courts. The auditor wanted to identify litigation and
claims resulting to risk of material misstatements. Suggest the auditor with reference to SAs.
OR
"P India" Ltd. is a manufacturer of various sports products. The company is having several cases of litigation
pending in courts. The auditor wanted to identify litigation and claims, which may give rise to risk of
material misstatements. Suggest the audit procedures in the given case.
Answer ➢ The auditor shall design and perform audit procedures to identify litigation and claims involving the
entity which may give rise to a risk of material misstatement, including

Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel;
Reviewing minutes of meetings of those charged with governance and
Correspondence between the entity and its external legal counsel; and
Reviewing legal expense accounts.

➢ If the auditor assesses a risk of material misstatement regarding litigation or claims that
have been identified, or when audit procedures performed indicate that other material
litigation or claims may exist, the auditor shall, in addition to the procedures required
by other SAs, seek direct communication with the entity’s external legal counsel.

QNO— Direct Communication with External Legal Counsel New Course – (SM25/J25M)
501.11.20 Bhaskar CNO - SA501.140
CA Kavita, auditor of Healthify Ltd., while assessing potential risks of material misstatement related to
litigations at Healthify Ltd., identified a possible legal claim that could affect the financial statements.
She sent a general inquiry letter to the company’s external legal counsel, Mohit & Co., seeking
clarification. However, Mohit & Co. informed her that their professional rules prohibited them from
responding to these general inquiries. Guide CA Kavita that what other option is available to obtain the
necessary information for the audit?
OR
The audit procedures performed so far by auditor of a company indicate that there is a possibility that
company has not disclosed all material litigation cases involving the company. Does such a situation
warrant direct communication by auditor with external lawyer of the company?
Answer If the auditor assesses a risk of material misstatement regarding litigation or claims that have been
identified, or when audit procedures performed indicate that other material litigation or claims may exist,
the auditor shall, in addition to the procedures required by other SAs, seek direct communication with the
entity’s external legal counsel. The auditor shall do so through a letter of inquiry requesting the entity’s
external legal counsel to communicate directly with the auditor.

If law, regulation or the respective legal professional body prohibits the entity’s external legal counsel from
communicating directly with the auditor, the auditor shall perform alternative audit procedures.

If it is considered unlikely that the entity’s external legal counsel will respond appropriately to a letter of
general inquiry, for example if the professional body to which the external legal counsel belongs prohibits
response to such a letter, the auditor may seek direct communication through a letter of specific inquiry.
For this purpose, a letter of specific inquiry includes:

(i) A list of litigation and claims;
(ii) 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; and
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