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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, the auditor, CA Meera, finds that the accounts payable ledger has been altered in a manner suggesting that expenses were deliberately omitted to inflate profit. The management says it was a clerical slip. Which statement best reflects the auditor's position under SA 240?

The auditor may suspect or even identify fraud, but does not make legal determinations of whether fraud has actually occurred. The auditor is concerned with fraud causing material misstatement, and the difference between fraud and error is intent, so the matter cannot be dismissed on management's word.

  1. AThe auditor should conclude that fraud has legally occurred and report it as a criminal offence
  2. BThe auditor may suspect or identify fraud, but does not make legal determinations of whether fraud has actually occurredCorrect
  3. CThe auditor should ignore the matter because fraud is a legal concept outside the auditor's concern
  4. DThe auditor should treat the matter as error because management has explained it as a clerical slip

Explanation

Under SA 240, the distinguishing factor between fraud and error is whether the underlying action is intentional. The auditor may suspect or in rare cases identify fraud but does not make legal determinations. Option A is wrong because the auditor cannot decide legally that fraud occurred; option D wrongly accepts management's explanation without evaluation.

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