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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error

Dalmar LLP's audit team discovers that a junior client employee has misappropriated a small sum from petty cash, which is clearly immaterial. How should this be handled under ISA 240?

The auditor should not ignore it. Fraud is evaluated whatever its size, since it may point to control weaknesses or wider problems, and it should be communicated to the appropriate level of management. An immaterial fraud does not by itself require a modified opinion or automatic police reporting.

  1. AIgnore it, since it is immaterial
  2. BEvaluate whether it indicates a wider control weakness, and communicate it to the appropriate level of management, as fraud is considered regardless of its materialityCorrect
  3. CReport it directly to the police in every case
  4. DModify the audit opinion because any fraud makes the statements misleading

Explanation

ISA 240 treats fraud differently from error: the auditor considers the implications of any identified fraud, even if immaterial, because it may indicate control weaknesses or involve management. It should be communicated to the appropriate level of management. Modifying the opinion is not required for an immaterial amount.

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