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CMA Intermediate · Corporate Accounting and Auditing · Nature, Scope, Objectives and Significance of Auditing

Kaveri Traders Ltd.'s auditor, using proper sampling, issued an unmodified opinion. Later, a fraud involving forged collusive documents by senior management was found. The auditor had planned and performed the audit in accordance with the Standards on Auditing. Which conclusion is most appropriate?

An audit planned and performed in line with the Standards on Auditing is not automatically deficient when collusive fraud or forgery surfaces later. Such fraud is an inherent limitation, and the risk of not detecting it is higher than for error because concealment can defeat normal audit procedures.

  1. AThe audit is not automatically deficient, because collusion and forgery are inherent limitations and the risk of not detecting such fraud is higher than for errorCorrect
  2. BThe auditor is necessarily liable because every fraud must be detected
  3. CThe audit standards are void because the fraud was missed
  4. DThe audit opinion proves that no fraud existed

Explanation

The risk of not detecting a material misstatement from fraud is higher than from error, since fraud may involve collusion, forgery or management override. An audit conducted per the Standards on Auditing is not deficient merely because such fraud later emerges. Claiming that every fraud must be detected overlooks these inherent limitations.

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