ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error
In auditing Dalton Retail, the auditor learns that the warehouse manager has been removing inventory and concealing the shortfall by posting false journal entries that increase recorded inventory counts. How should this be classified under ISA 240?
This is misappropriation of assets. The manager stole inventory and falsified entries only to hide the theft. ISA 240 classifies fraud by its objective, and concealment through false records is a common feature of misappropriation rather than fraudulent financial reporting.
- AFraudulent financial reporting, because journal entries were falsified
- BError, because the inventory records were misstated
- CMisappropriation of assets, because assets were stolen and the theft concealed by falsified recordsCorrect
- DNon-compliance with laws and regulations only, because theft is illegal
Explanation
The primary act is theft of inventory, which is misappropriation of assets. Falsified records used to conceal it do not change the classification, since the aim was not to misstate the financial statements to deceive users. It is not error because it is intentional.
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