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

While auditing Bharat Components Ltd, CA Rohit notices unusual journal entries that increase revenue just before year-end, suggesting possible fraudulent financial reporting. Management strongly denies any wrongdoing. Which conclusion is consistent with SA 240 regarding Rohit's role?

Rohit may suspect or identify fraud, and must be concerned with fraud causing material misstatement, but he does not make legal determinations of whether fraud has actually occurred. Declaring legal fraud or accepting denial blindly would both be inconsistent with SA 240.

  1. ARohit should conclude that fraud has legally occurred and state so in the audit report as a legal finding
  2. BRohit may suspect or even identify fraud but does not make legal determinations of whether fraud has actually occurred; he is concerned with fraud causing material misstatementCorrect
  3. CRohit should ignore the entries because the auditor has no responsibility for fraud causing material misstatement
  4. DRohit should accept management's denial as conclusive, since the auditor cannot challenge representations

Explanation

SA 240 says the auditor is concerned with fraud causing material misstatement in the financial statements. Although the auditor may suspect or in rare cases identify fraud, the auditor does not make legal determinations of whether fraud has actually occurred. Accepting denial as conclusive or declaring legal fraud both misstate the role.

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