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CS Professional · Internal and Forensic Audit · Basic Concepts of Forensic Audit

A statutory auditor of Bharat Agro Ltd finds no material misstatement in the financial statements after sample testing, yet a later forensic review uncovers a small, concealed fraud by a clerk. Which explanation best reconciles these outcomes?

A statutory audit gives reasonable assurance about material misstatement using sampling, so a small or well-concealed fraud can go undetected. Forensic audit examines specific suspicious transactions in depth regardless of materiality, which is why it can reveal what the statutory audit did not.

  1. AThe statutory auditor is legally required to detect every fraud irrespective of materiality
  2. BStatutory audit uses materiality and sampling to give reasonable assurance, so immaterial or concealed frauds may go undetectedCorrect
  3. CForensic auditors are not bound by any evidence standards
  4. DSampling is prohibited in statutory audits

Explanation

Statutory audit provides reasonable, not absolute, assurance on material misstatement using sampling, so small or well-concealed frauds can escape. Forensic audit digs deeply into specific transactions irrespective of materiality. The first option wrongly imposes a duty to detect every fraud.

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