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

During the audit of Orient Steels Ltd., CA Farah discovers that the company's accountant has passed a fictitious purchase entry. Farah's team had performed the audit in accordance with the SAs, yet the fraud was not detected. Which statement best reflects the auditor's position under SA 240 and SA 200?

An audit properly planned and performed under the SAs may still fail to detect a material misstatement, particularly fraud involving collusion or concealment. This inherent limitation does not in itself indicate auditor failure, though the auditor still must obtain reasonable assurance and maintain professional scepticism.

  1. AThe auditor is automatically liable because every fraud must be detected in a statutory audit
  2. BThe auditor is not responsible for fraud at all, since the responsibility rests only with management
  3. CThe unavoidable risk that some material misstatements may not be detected, even when the audit is properly planned and performed under the SAs, does not itself indicate failure, especially for fraud involving collusion or concealmentCorrect
  4. DThe audit must be treated as a forensic audit, so detection of all fraud is guaranteed

Explanation

SA 200 and SA 240 recognise that undetected misstatement may occur despite a properly conducted audit, particularly fraud involving collusion or forgery. The auditor still has a duty to obtain reasonable assurance and to be alert to fraud. The first option overstates and the second understates his duty.

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