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

Two types of intentional misstatement are relevant to the auditor under SA 240. A cashier at Sundaram Traders Ltd diverts customer receipts of Rs 4 lakh and conceals it through false ledger entries. How should the auditor classify this?

This is misappropriation of assets. SA 240 recognises two types of intentional misstatement, fraudulent financial reporting and misappropriation of assets. The cashier stole entity cash, and the false entries only concealed the theft, so the nature of the act is asset misappropriation, not fraudulent reporting.

  1. AFraudulent financial reporting, because ledger entries were falsified
  2. BMisappropriation of assets, because cash receipts were stolenCorrect
  3. CError, because the amount is small
  4. DNon-compliance with laws, because it violates the Indian Penal Code

Explanation

SA 240 identifies two relevant types of intentional misstatement: fraudulent financial reporting and misappropriation of assets. Diversion of receipts is theft of an entity's assets, so it is misappropriation, even though records were falsified to conceal it. Option A confuses the concealment method with the objective.

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