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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 finds that a sales manager has been booking fictitious credit notes to hide cash collections for personal use. The amount is material. Which statement best reflects the auditor's responsibility under SA 240 regarding the nature of this finding?

The auditor may suspect or identify fraud, such as misappropriation of assets, but does not make legal determinations of whether fraud has actually occurred. SA 240 covers both fraudulent financial reporting and misappropriation of assets, and the distinguishing factor from error is intent.

  1. AThe auditor concludes legally that fraud has occurred and must report it as a criminal offence in the audit report
  2. BThe auditor treats it as an error because the amount arises from documentation lapses
  3. CThe auditor may suspect or identify the occurrence of fraud, but does not make legal determinations of whether fraud has actually occurredCorrect
  4. DThe auditor ignores it because misappropriation of assets is outside the scope of SA 240

Explanation

SA 240 states that two types of intentional misstatements are relevant to the auditor: fraudulent financial reporting and misappropriation of assets. The auditor may suspect or identify fraud but does not make legal determinations. Option A is wrong because it reaches a legal conclusion, which the auditor does not do. Option D is wrong because misappropriation of assets is expressly within scope.

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