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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

During the audit of Bharat Pumps Ltd., CA Nitin identifies a material misstatement that could not be detected despite the audit being planned and performed in accordance with the Standards on Auditing, because management colluded with a third party and forged documents. Which of the following is the correct position?

The auditor is not automatically in breach. Fraud involving collusion and forged documents is harder to detect than error, and an audit properly planned and performed under the SAs may still miss it. The auditor still has duties under SA 240, but this inherent limitation does not itself show non-compliance.

  1. AThe auditor is automatically liable since the misstatement exists in audited statements
  2. BThe audit is not necessarily non-compliant with SAs; the risk of not detecting fraud, particularly involving collusion and forgery, is higher than for error, and is an inherent limitationCorrect
  3. CThe auditor should have obtained absolute assurance by examining every transaction
  4. DThe auditor is relieved from all responsibility for fraud under SA 240

Explanation

An audit properly planned and performed under SAs may still fail to detect a material misstatement from fraud involving collusion or forgery; this is an inherent limitation. Option 0 ignores this. Option 2 is impractical and not required. Option 3 is wrong because SA 240 still imposes responsibilities to identify and assess fraud risks.

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