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

During the audit of Vindhya Steels Ltd, CA Isha discovers that the managing director has instructed the accounts head to hide a related-party loan by splitting it into smaller entries booked under different party names. The auditor's planned sampling would not normally detect this. Which statement best describes the auditor's position under SA 240 and SA 200?

The auditor is not responsible for preventing fraud, yet she must assess fraud risks and apply professional scepticism. Concealment through management override or collusion is a recognised inherent limitation that makes detection harder. She is not automatically liable if a properly planned and performed audit fails to detect it.

1. AIsha is automatically liable for the fraud because she failed to detect it
2. BIsha is not responsible for preventing fraud, but must plan and perform the audit with professional scepticism and recognise that concealed collusion or management override is a higher risk that makes detection harderCorrect
3. CIsha has no duty to consider fraud because it is solely management's responsibility
4. DIsha must stop the audit and resign immediately on suspecting any fraud