Give your comments on the following situation. ( December 2015)
The management of Sathi Limited suggested for quick completion of the statutory audit that it would give its representation about the receivables in terms of their recoverability. The management also acknowledged to the auditors that the management would give their representation after scrutinizing all accounts diligently and they own responsibility for any errors in these respects. They wanted auditors to complete the audit checking all other important areas except receivables. The auditor certified the account clearly indicating in his report the fact of reliance he placed on representation of the management.
The management of Sathi Limited wants the auditor to carry out audit on all areas, except on area of receivables. There cannot be any restriction on scope of audit in case of statutory audit.
The management representation, according to NSA 580, cannot substitute another audit evidence that the auditor could reasonably expect to be available to the auditor.
The audit evidence for checking receivables – say, invoices, debt acknowledgement documents, receipts, statement of accounts, confirmations etc., are available evidences which auditor is duty bound to verify.
Just because management had owned responsibility for the correctness of its evaluation of receivables, the auditor cannot shirk his responsibility. This is negligence on his part if he relies on the management representation without assessing the corroborative available evidences.