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

Case: CA Rohit, the statutory auditor of Deccan Pharma Ltd, discovers that the company's CFO has been inflating revenue through bill-and-hold entries at year-end to meet loan covenants. Rohit suspects the fraud involves management. Which action is most appropriate for the auditor?

The auditor should communicate the suspected management fraud promptly to those charged with governance, such as the audit committee or board, and consider statutory reporting duties for fraud. Raising it only with the CFO is inappropriate because the CFO is the suspected perpetrator.

  1. ADiscuss only with the CFO and let the CFO correct entries without reporting
  2. BCommunicate the matter on a timely basis to those charged with governance (and consider reporting responsibilities under law, including to the Central Government where applicable) since management is involvedCorrect
  3. CResign immediately without any communication
  4. DIgnore it because revenue misstatements are always immaterial

Explanation

Where fraud involves management, the auditor communicates to those charged with governance on a timely basis, as discussing only with involved management is inappropriate. Reporting duties under the Companies Act for fraud must also be considered. Option A leaves the perpetrator in control.

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