Receivables Confirmations, a Disputed Credit Note and a Valuer's Optimistic Assumptions

SA 505 requires the auditor, where a confirmation is not received, to perform alternative audit procedures to obtain relevant and reliable evidence about the balance. Non-response is not evidence that the balance is correct, and it does not by itself create a scope limitation - the limitation arises only if alternatives also fail.

Appropriate alternatives here, applied to the 18 debtors (43% of receivables, clearly material):

• Subsequent receipts: agree amounts received after 31 March to bank statements and remittance advices, matching payer name, amount and date. This is the strongest alternative because it is external evidence.
• Underlying documents: inspect sales invoices, dispatch documents, e-way bills, GSTR-1 and customer purchase orders, testing that the amount, customer and date agree.
• Post-year-end credit notes and returns attributable to pre-year-end sales.
• Correspondence: statements of account sent to and acknowledged by the customer, and email trails agreeing balances.

The auditor should also stand back and evaluate what the pattern means (SA 505 read with SA 240): 18 of 30 non-responses is a high rate, and this must feed back into the assessed risk of material misstatement for the receivables class - in particular the possibility of fictitious debtors or of management intercepting replies. Because the auditor controlled addressing and dispatch, interception is less likely but still to be considered by checking that the addresses used were not altered.

If, for a material balance, neither confirmations nor alternatives provide sufficient appropriate evidence, the auditor cannot conclude; that is a limitation on the scope of the audit and SA 705 requires a qualified opinion (or a disclaimer if pervasive), after communication with those charged with governance.

A confirmation exception must be investigated, not explained away. SA 505 requires the auditor to reconcile the difference and investigate the reasons.

• Obtain the February 2026 correspondence and the agreed terms for the expired-stock credit note, the return/goods receipt records and the distributor's debit note, if any. If the credit note was agreed in February 2026, the customer's obligation was extinguished before the year end and the receivable at 31 March 2026 is ₹0.7 crore, not ₹3.1 crore. Management's "timing difference" label is a description, not evidence, and the fact that the paperwork is issued in April does not change the substance of the February agreement.
• Assess materiality: ₹2.4 crore is 2.5% of receivables but likely a far larger proportion of profit; if it is material, an uncorrected misstatement must be accumulated and evaluated in aggregate with other findings (SA 450).
• Consider the wider implication: if this credit note was not booked, are other customers' credit notes also unrecorded? That may require revising the risk assessment for the whole receivables and revenue population, and testing post-year-end credit notes across all major customers.
• Obtain a written representation confirming that all credit notes and disputes agreed before the year end have been recorded (SA 580) - useful, but not a substitute for the documentary evidence.
• Communicate the matter to those charged with governance (SA 260) with the auditor's proposed adjustment and management's reasons for not adjusting.

If management still refuses and the effect is material, the financial statements are materially misstated: issue a qualified opinion under SA 705, describing and quantifying the matter in the Basis for Qualified Opinion. If the misstatement, combined with other uncorrected items, becomes pervasive, an adverse opinion follows.

A management expert's report is not a substitute for audit evidence; SA 500 requires the auditor to evaluate it, and SA 620 governs the auditor's use of an auditor's expert where one is engaged.

Competence, capability and objectivity (SA 500, para 8): confirm the valuer's registration and that investment-property valuation is within his field; check his independence from the company - unrelated, unconnected, no other engagement creating a self-interest threat - and whether his instructions came from management or were drafted to support a desired figure.

Adequacy of the work: the two assumptions are the heart of the matter. A 9% discount rate against market evidence of 12%, combined with rental growth of 6% against 3%, both push value upwards, and they push it in the same direction. The auditor should:

• ask the valuer to explain the basis for each assumption and the source data;
• test the assumptions against comparable transactions, published yields and the actual rent roll and lease terms;
• scrutinise the cash flow projections for internal consistency (occupancy, rent escalation, void periods, capital expenditure);
• run a sensitivity analysis to see how far value moves on a 12%/3% basis.

If the property is material and the valuation is complex or the range is wide, the auditor may engage his own valuation expert (SA 620) to develop a point estimate or range.

Conclusion: the report as it stands cannot be accepted. If, on testing, the reasonable range does not include ₹48 crore, the carrying amount is misstated by the difference and must be accumulated as a misstatement (SA 450) and, if material, reported as a qualification. It should not be listed as a Key Audit Matter after it has become a basis for modification.