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

During the audit of Himalaya Pharma Ltd, CA Tanvi finds that the sales manager, in collusion with a customer, forged delivery acknowledgements to book sales early. The forgery was well concealed, and Tanvi's audit, planned and performed per the SAs, failed to detect it. Which statement is most appropriate?

An audit properly planned and performed under the Standards on Auditing may still miss a material misstatement, particularly fraud involving collusion and forgery, because such concealment is harder to detect than error. Non-detection alone does not prove the audit was deficient.

  1. AThe audit was necessarily non-compliant with SAs because a material misstatement went undetected
  2. BThe auditor is liable automatically since fraud was present in the financial statements
  3. CThe risk of not detecting fraud involving collusion and forgery is higher, and an audit performed per SAs may still fail to detect itCorrect
  4. DThe auditor should have treated every delivery acknowledgement as presumed forged

Explanation

SA 200 recognises that an unavoidable risk remains that some material misstatements are not detected even if the audit is properly planned and performed. Fraud involving collusion, forgery or concealment is harder to detect than error. Non-detection alone does not prove non-compliance, and auditors do not presume documents are forged.

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