Page 211 - CA Inter Audit PARAM

CA Ravi Taori

QNO-- Responsibility to Communicate Misstatement & Refusal by Management New Course – (M24M)
450.20 Bhaskar CNO – SA450.040

Up and High Private Limited has started its export business during the year 2023-24. The company was
catering to domestic market only in past years. CA H, statutory auditor of the company, is of the view that
the company has understated its revenue by ₹ 50.00 lacs in the year 2023-24 by not complying with
requirements of AS 9 relating to revenue recognition.

(i) Discuss responsibilities of statutory auditor to communicate with management in the above situation
in accordance with SA 450. Also explain the usefulness of such communication.

(ii) If management refuses to correct misstatement as communicated by the statutory auditor, how should
he proceed?
Answer The above situation is an example of misstatement relating to noncompliance with requirements of AS 9
identified during audit. In accordance with requirements of SA 450, the auditor shall communicate on a timely
basis all misstatements accumulated during the audit with the appropriate level of management, unless
prohibited by law or regulation. The auditor shall request management to correct those misstatements.

Timely communication of misstatements to the appropriate level of management is important as it enables
management to evaluate whether the items are misstatements, inform the auditor if it disagrees and take
action as necessary. The correction by management of all misstatements, including those communicated by
the auditor, enables management to maintain accurate accounting books and records and reduces the risks
of material misstatement of future financial statements because of the cumulative effect of immaterial
uncorrected misstatements related to prior periods.

If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor
shall obtain an understanding of management’s reasons for not making the corrections and shall take that
understanding into account when evaluating whether the financial statements as a whole are free from
material misstatement.

QNO— Communication with TCWG about Uncorrected Misstatements New Course – (SM25)
450.50 Bhaskar CNO - SA450.120

You are nearing completion of audit of a company. On going through your working papers, it is noticed
that finished goods inventory was overvalued by Rs. 2 crores. It has also been noticed that freight of
Rs.10 lacs paid on import of machinery was charged to statement of profit and loss. Discuss, how you
should, proceed and communicate in above situation before signing audit report.
Answer Communication with Governance about Uncorrected Misstatements: The auditor shall communicate
with those charged with governance regarding uncorrected misstatements and the effect that they,
individually or in aggregate, may have on the opinion in the auditor's report, unless prohibited by law or
regulation.
Identification of Material Uncorrected Misstatements: The auditor's communication shall identify
material uncorrected misstatements individually. The auditor shall request that uncorrected
misstatements be corrected.
Effect of Prior Periods' Uncorrected Misstatements: The auditor shall also communicate with those
charged with governance the effect of uncorrected misstatements related to prior periods on the relevant
classes of transactions, account balances or disclosures, and the financial statements as a whole.

Case Discussion & Analysis: The instances highlighted in above situation are examples of misstatements
identified during the audit. Over valuation of inventory of finished goods by Rs. 2 crore and wrongly
charging freight of Rs. 10 lacs paid on machinery to statement of profit and loss instead of capitalizing are
examples of misstatements.

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