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

During the statutory audit of Kaveri Textiles Ltd, CA Meera finds that a series of year-end sales entries were booked without dispatch records, and she strongly suspects management intentionally overstated revenue. Which statement best describes her position under SA 240?

The auditor may suspect or, in rare cases, identify fraud, but does not make legal determinations about whether fraud has actually occurred. The auditor's concern is fraud causing material misstatement, and the distinguishing factor between fraud and error is whether the underlying action was intentional or unintentional.

  1. AShe must first obtain a court judgment, because only a court can decide whether fraud occurred, and she can then evaluate the effect on the financial statements
  2. BShe may suspect or, in rare cases, identify fraud, but she does not make legal determinations of whether fraud has actually occurredCorrect
  3. CShe should conclude that fraud has legally occurred once the suspicion is supported by missing dispatch records
  4. DShe should treat the matter as error, because intent can never be considered by an auditor

Explanation

SA 240 says the auditor may suspect or, in rare cases, identify the occurrence of fraud, but does not make legal determinations of whether fraud has actually occurred. Option 2 is wrong because it makes a legal determination. Option 4 is wrong because intent is the very factor that distinguishes fraud from error.

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