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CA Final · Advanced Auditing, Assurance and Professional Ethics · General Auditing Principles and Auditors Responsibilities

CA Anita is auditing Himalaya Pharma Ltd. She discovers that a senior accounts officer deliberately recorded fictitious sales to meet a bonus target, and another employee diverted cash receipts. Considering the two types of intentional misstatement relevant under SA 240, which classification is correct?

Fictitious sales recorded to meet a bonus target are fraudulent financial reporting, while diversion of cash receipts is misappropriation of assets. SA 240 recognises these two types of intentional misstatement, and both differ from error, which is unintentional.

  1. ABoth are misappropriation of assets
  2. BFictitious sales are fraudulent financial reporting; diversion of cash receipts is misappropriation of assetsCorrect
  3. CFictitious sales are error; diversion of cash is fraud
  4. DBoth are fraudulent financial reporting

Explanation

SA 240 identifies two types of intentional misstatement: fraudulent financial reporting and misappropriation of assets. Fictitious sales misstate the financial statements deliberately, while diverting cash takes the entity's assets. Option C is wrong because both actions are intentional, so neither is error.

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