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

Neha Gupta, auditor of Alpha Pharma Ltd, finds that the sales head and a customer colluded to forge delivery confirmations. The forgery was sophisticated, and the audit was planned and performed in accordance with SAs. A shareholder later alleges the auditor was negligent for not detecting it. What is the most appropriate view?

Failure to detect a material misstatement caused by collusion or skilful forgery does not by itself show negligence, provided the audit was properly planned and performed under the Standards on Auditing. The auditor is not liable automatically, though liability remains if work fell short of SAs.

  1. AThe auditor is automatically negligent, as every fraud must be detected
  2. BThe auditor is not automatically negligent; the inability to detect a material misstatement from collusion and forgery may not indicate failure to comply with SAs if the audit was properly planned and performedCorrect
  3. CThe auditor is never liable for fraud of any kind
  4. DThe auditor is liable only if the fraud exceeds 5% of profit

Explanation

SA 200 says an audit conducted per SAs may still fail to detect a material misstatement from fraud involving collusion or forgery, as such evidence can be convincing. This alone does not show non-compliance. Option 3 is wrong because the auditor remains liable if the audit was not properly planned and performed.

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