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

While auditing Bharat Steels Ltd, the auditor's team identifies several misstatements in the financial statements. The audit senior asks how to decide whether a given misstatement is fraud or error. According to SA 240, what is the distinguishing factor?

The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional. Amount, who found it, or its effect on profit does not determine whether it is fraud.

  1. AWhether the misstatement is material in amount
  2. BWhether the underlying action resulting in the misstatement is intentional or unintentionalCorrect
  3. CWhether the misstatement was found by the internal auditor or the statutory auditor
  4. DWhether the misstatement affects the profit or only balance sheet classification

Explanation

SA 240 states that misstatements can arise from fraud or error, and the distinguishing factor is whether the underlying action is intentional or unintentional. Materiality, detector and income effect do not distinguish them.

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