CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

In the audit of Vindhya Foods Ltd, the auditor identifies that cash sales are recorded through point-of-sale terminals, and the company's cash deposited in the bank is consistently lower than daily POS totals by small amounts over the year, aggregating Rs 18 lakh against turnover of Rs 40 crore (materiality Rs 40 lakh). The cashier is also responsible for preparing the bank reconciliation. Which response is most appropriate?

The auditor should treat the shortfall as a possible fraud indicator despite being below quantitative materiality, evaluate the segregation-of-duties weakness, extend audit procedures on cash and revenue, and communicate with management and those charged with governance. Direct government reporting comes only after that prescribed process.

1. AConclude there is no issue because the amount is below materiality
2. BTreat it as a possible fraud indicator, consider qualitative aspects and the control deficiency in segregation of duties, extend procedures on cash and revenue, and communicate with management and those charged with governanceCorrect
3. CReport it to the Central Government immediately under the fraud reporting provisions, before discussing with management
4. DRequire the company to adjust the deficiency in the following year and take no further action