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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Ashoka Infra Ltd, a listed company, has total assets of Rs 800 crore. The auditor, CA Neha, discovers that the CFO diverted Rs 3 crore (below overall materiality of Rs 6 crore) to a related entity without approval, and that the audit committee was not told. Management says the amount is immaterial. CA Neha concludes the transaction may involve fraud by senior management. Which response is MOST consistent with the auditing standards and Companies Act expectations?

The auditor should treat the diversion as qualitatively significant despite being below materiality, reassess fraud and management override risk and the reliability of representations, communicate with those charged with governance, and consider the statutory fraud reporting requirements. Quantitative immateriality does not excuse fraud involving senior management.

  1. AIgnore it because the amount is below overall materiality
  2. BTreat it as qualitatively significant, reassess risk of management override and integrity, communicate with those charged with governance, and consider reporting requirements for fraudCorrect
  3. COnly ask the CFO to reverse the entry and take no further step
  4. DResign immediately without communicating with anyone

Explanation

Fraud involving senior management is qualitatively significant even if quantitatively below materiality, as it questions management integrity and reliability of representations. The auditor should reassess risks, communicate with those charged with governance, and consider statutory fraud reporting duties. Asking only for reversal or resigning silently is inadequate; ignoring it is wrong because materiality is not only quantitative.

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