Skip to content

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

Case: Pragati Finance Ltd, an NBFC, is being audited. The auditor notes that the CFO also acts as the compliance officer, and a whistle-blower email alleges that the CFO has diverted Rs 3 crore of loan recoveries. The auditor has not yet verified the allegation. Under SA 240 and the Companies Act, 2013, what is the correct course of action?

The auditor should perform procedures to examine the allegation. If he then has reason to believe that a fraud of Rs 1 crore or more is being committed by officers or employees, he must report it to the Central Government under Section 143(12), after seeking management's views.

  1. AIgnore it, as an anonymous allegation is not evidence
  2. BPerform procedures to investigate the allegation, and if he has reason to believe a fraud is being committed by officers, report as required under Section 143(12) to the Central Government if the amount is Rs 1 crore or more after obtaining management's viewsCorrect
  3. CReport directly to SEBI before discussing with anyone
  4. DResign immediately from the audit

Explanation

SA 240 requires the auditor to respond to fraud allegations by performing appropriate procedures. Under Section 143(12), if the auditor has reason to believe an offence involving fraud of Rs 1 crore or more is being committed by officers or employees, he reports to the Central Government after seeking management's reply within the prescribed time. Ignoring the allegation or resigning without procedures is not appropriate.

Did you get it right without looking?

One question tells you little. A timed set on Advanced Auditing, Assurance and Professional Ethics shows your real accuracy, how long you take and where you lose marks.

Practise Advanced Auditing, Assurance and Professional EthicsFree diagnostic mock

More Advanced Auditing, Assurance and Professional Ethics questions