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CA Final · Advanced Auditing, Assurance and Professional Ethics · Digital Auditing & Assurance

Arjun & Associates audit Nilgiri Retail Ltd., which has a large volume of sales entries. The engagement team uses data analytics to test 100% of journal entries, filtering for entries posted on Sundays by users outside the finance team and with round-rupee amounts. The tool flags 40 entries. Which action is most appropriate?

The auditor should investigate the flagged entries by obtaining explanations and supporting documents and then evaluate whether they point to fraud or misstatement. Flagged items are only exceptions, not proven misstatements, and external reporting arises only if the auditor has reason to believe fraud has occurred.

  1. ATreat all 40 as misstatements and propose adjustment
  2. BDisregard them because analytics cannot replace sampling
  3. CInvestigate the flagged entries by obtaining explanations and supporting documents, and evaluate whether they indicate fraud risk or misstatementCorrect
  4. DReport the 40 entries to the Registrar of Companies immediately

Explanation

Flagged items are exceptions needing follow-up, not conclusions of misstatement. The auditor should inspect support, enquire, and assess implications for fraud risk. Analytics can be used as audit procedures, and immediate ROC reporting is not the first step; reporting under fraud provisions arises only after the auditor has reason to believe fraud has occurred.

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