Management refuses to book an audit adjustment you believe is material. How do you handle it?

What the interviewer wants to hear

• Makes sure the evidence and analysis are solid
• Explains the issue and the standard clearly to management
• Escalates to those charged with governance
• Evaluates effect of uncorrected misstatements in aggregate
• Modifies the opinion if needed and documents the matter

Model answer

First I would re-check my own position: the facts, the calculation and the requirement in the accounting standard, and consult technical experts in the firm if it is a complex area. Then I would meet management, explain the issue clearly with the evidence, and listen to their reasons, because sometimes they have information I have not seen. If they still refuse, under SA 450 I would communicate the uncorrected misstatement to those charged with governance, usually the audit committee, and explain its effect on my report. I would evaluate it together with other uncorrected misstatements, in total and by nature. If the total is material, I would issue a qualified opinion, or an adverse one if pervasive, under SA 705. I would get written representations stating why management believes uncorrected items are immaterial, and document the discussions. Professional skepticism and independence mean I do not drop a material issue to keep a client happy.

More hard Auditor questions

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• During the audit you find signs that a senior manager may be diverting payments to a vendor he controls. What do you do?
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• Related party transactions are a significant risk at a family-owned listed company. How would you audit them?
• The client’s CFO pressures you to sign the audit report today, but key evidence on a large provision is still pending. What do you do?
• How have you used, or would you use, data analytics to improve audit quality?
• Besides the main opinion, Indian statutory auditors report under CARO 2020 and on internal financial controls. How do you build this into the audit?