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CA Final · Advanced Auditing, Assurance and Professional Ethics · General Auditing Principles and Auditors Responsibilities

Rao & Co is auditing Sagar Foods Ltd. The company's payroll is processed entirely by an outside payroll bureau. During the audit, the engagement partner notes that the intentional understating of expenses in the financial statements would be relevant to the auditor. Which pair of intentional misstatement types does SA 240 identify as relevant to the auditor?

The two types of intentional misstatement relevant to the auditor under SA 240 are misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. Unintentional errors are a different category because the distinction between fraud and error is intent.

  1. AFraudulent financial reporting and misappropriation of assetsCorrect
  2. BErrors of omission and errors of commission
  3. CFraudulent financial reporting and unintentional clerical errors
  4. DMisappropriation of assets and non-compliance with tax laws

Explanation

SA 240 states that two types of intentional misstatements are relevant to the auditor: those resulting from fraudulent financial reporting and those resulting from misappropriation of assets. Errors are unintentional and so not part of the pair. The option with clerical errors fails because they are unintentional.

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