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

In the audit of Greenfield Pharma Ltd, CA Isha discovers that a senior manager colluded with an outside vendor and forged delivery confirmations, and the fraud was not detected although Isha planned and performed the audit in accordance with the SAs. Later the company alleges she failed in her duty. Which assessment is most appropriate under SA 200 and SA 240?

Isha is not automatically negligent. Fraud involving collusion and forged documents is an inherent limitation, so a properly planned and performed audit may still miss it. She still bears the duty of reasonable assurance and scepticism, so the key test is compliance with the SAs.

  1. AThe auditor is automatically negligent, because any undetected material misstatement proves the audit was not properly performed
  2. BThe auditor is not necessarily negligent, because collusion and forgery are inherent limitations, and an audit planned and performed per SAs may still fail to detect a material misstatementCorrect
  3. CThe auditor is fully liable only if the fraud is below the materiality level
  4. DThe auditor is never responsible for fraud, as SA 240 puts the entire duty on management

Explanation

SA 200 notes that an unavoidable risk of undetected material misstatement exists even when the audit is properly planned and performed, especially with fraud involving collusion or forgery. SA 240 still requires the auditor to obtain reasonable assurance and to maintain scepticism, so option D is wrong. Option A treats non-detection as proof of negligence, which SAs reject. Option C is irrelevant, since immaterial items are not the issue.

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