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CA Final · Advanced Auditing, Assurance and Professional Ethics · General Auditing Principles and Auditors Responsibilities

During the audit of Kaveri Textiles Ltd, CA Meera finds that a purchase invoice was booked twice, which overstated expenses. After discussion, management shows that a clerk keyed the invoice twice by mistake with no intent to deceive. How should Meera characterise the misstatement under SA 240?

The misstatement is an error. Under SA 240, fraud and error are distinguished by whether the underlying action causing the misstatement was intentional or unintentional. The duplicate booking was a clerical slip without intent to deceive, so it is not fraud.

  1. AAs an error, because the distinguishing factor between fraud and error is whether the underlying action was intentional or unintentionalCorrect
  2. BAs fraud, because any misstatement of expenses must be treated as fraudulent financial reporting
  3. CAs fraud, because the auditor must make a legal determination once a duplicate entry is found
  4. DAs misappropriation of assets, because the duplicate booking could allow a payment to be diverted

Explanation

SA 240 states that misstatements can arise from fraud or error, and the distinguishing factor is whether the underlying action is intentional or unintentional. The clerk's keying was unintentional, so it is an error. Treating it as fraud ignores the intent test.

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