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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

CA Meera is auditing Deccan Steels Ltd. During the audit she discovers that the Managing Director has instructed the accountant to delay recording certain purchase invoices to show a higher profit. Management says the auditor's job is only to detect errors, not to bother with such matters. Which is the correct view under SA 240 and SA 200?

The auditor must obtain reasonable assurance that the financial statements are free from material misstatement, whether from fraud or error, and must maintain professional scepticism. Management bears primary responsibility for preventing fraud, but the auditor cannot ignore it, nor guarantee detection of every fraud.

  1. AThe auditor has no responsibility for fraud because it is solely management's responsibility
  2. BThe auditor must obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and maintain professional scepticismCorrect
  3. CThe auditor must guarantee that all frauds in the company are detected
  4. DThe auditor should consider only errors, since fraud is a matter for the police

Explanation

SA 240 requires the auditor to obtain reasonable assurance that financial statements are free from material misstatement due to fraud or error, exercising professional scepticism. Primary responsibility for prevention and detection rests with management, but the auditor is not excused. The auditor does not guarantee detection of all fraud.

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