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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, the engagement partner CA Rohan Mehta finds that a senior accountant has been booking fictitious credit notes to hide a shortfall in cash collections. The amounts appear material. Which statement best describes the auditor's position under SA 240?

Under SA 240 the auditor may suspect or in rare cases identify fraud, but does not make legal determinations on whether fraud has actually occurred. The auditor's concern is material misstatement from fraudulent reporting or misappropriation of assets, not a legal verdict of guilt.

  1. AThe auditor must conclude that fraud has legally occurred and inform the police before completing the audit
  2. BThe auditor may suspect or identify fraud but does not make legal determinations of whether fraud has actually occurredCorrect
  3. CThe auditor is concerned only with fraud by management and may ignore misappropriation of assets by employees
  4. DThe auditor should treat the matter as error because the intent behind the entries cannot be audited

Explanation

SA 240 states that although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred. The option about informing the police wrongly assumes the auditor makes a legal finding. Misappropriation of assets is one of the two types of relevant fraud, so ignoring it is wrong.

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