MCQ 1 — SA 505 Management refuses confirmation — but is management actually wrong? During the audit

MCQ 1 — SA 505

Management refuses confirmation — but is management actually wrong?

During the audit of Artemis Ltd., trade receivables include ₹14 crore due from Zen Ltd.

The auditor selects Zen for a positive external confirmation.

Artemis’ management refuses to permit the auditor to send the confirmation, stating that Zen has expressly requested that no confirmation requests be sent during the period because its finance department is undergoing a major ERP migration.

The auditor independently verifies that:

Zen has communicated the same restriction to several other business counterparties;
there is no indication of a dispute between Artemis and Zen;
₹10 crore of the balance was subsequently received directly into Artemis’ bank account;
the remaining ₹4 crore is supported by invoices, dispatch documents and correspondence with Zen.

The audit senior states:

“Management’s refusal itself represents a limitation on the audit and the auditor must therefore modify the opinion unless a confirmation is eventually obtained.”

The engagement partner disagrees.

Which ONE of the following is correct?

A. The partner is correct.

B. The senior’s position remains preferable because, notwithstanding the apparent commercial reason for the refusal, SA 505 treats management’s refusal as a limitation on audit evidence and requires the auditor to obtain a confirmation before the receivable can be considered satisfactorily tested.

C. The senior is correct unless management can demonstrate that Zen has imposed an identical restriction upon every entity dealing with it, since only such evidence would establish that the refusal is objectively reasonable rather than being an attempt by management to prevent the auditor from obtaining contradictory external evidence.

D. The partner may ultimately be correct, but only after establishing that the subsequent receipt of ₹10 crore, the supporting documentation for ₹4 crore and the absence of a known dispute collectively constitute alternative procedures that provide evidence equivalent in reliability to a positive external confirmation; until then, the refusal necessarily remains a scope limitation requiring modification.