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

Dalton Ltd's auditor, Priya, completes an audit in which no material misstatement is found. Six months later, a fraud by the finance director is discovered that had existed during the audited period. Which statement best describes Priya's position under ISA 240?

Priya is not automatically in breach. An audit provides reasonable, not absolute, assurance, and the auditor is responsible for performing the audit in line with ISAs. Prevention and detection of fraud remain primarily the responsibility of management and those charged with governance, so later discovery alone does not prove failure.

  1. AShe is automatically in breach of ISA 240 because the fraud was not detected
  2. BShe is not in breach if she planned and performed the audit in accordance with ISAs, because the audit gives reasonable, not absolute, assuranceCorrect
  3. CShe is liable because the primary responsibility for preventing fraud rests with the auditor
  4. DShe must withdraw her audit opinion because later discovery of fraud invalidates it

Explanation

ISA 240 recognises the inherent limitations of an audit: the auditor obtains reasonable assurance, and the risk of not detecting fraud (especially involving collusion or concealment) is higher than for error. A later-discovered fraud does not of itself show a breach if the audit was properly planned and performed under ISAs. Responsibility for prevention and detection rests primarily with management and those charged with governance.

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