ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error
While auditing Brightwell Pharma, the auditor finds that a significant sale was recorded on terms differing from the contract, and management gives an inconsistent explanation. The auditor now suspects fraud may exist. What should the auditor do first under ISA 240?
The auditor should first evaluate the implications of the suspected fraud, reassessing the risks of material misstatement, the reliability of management representations, and the extent of further procedures. Immediate resignation or ignoring it as immaterial would be wrong, since fraud can be qualitatively significant.
- AEvaluate the implications for the audit, including reassessing risks and the reliability of management representations, and consider the need for further proceduresCorrect
- BStop the audit and resign immediately
- CReport the matter directly to the regulator without discussing it with management or those charged with governance
- DDisregard the matter if the amount is below overall materiality
Explanation
When misstatements indicate possible fraud, ISA 240 requires the auditor to evaluate the implications, particularly the reliability of management representations, and reconsider the risk assessment and nature, timing and extent of procedures. Resignation or external reporting may be considered later, depending on law. Fraud is not dismissed on size alone, as it may indicate wider problems and be qualitatively material.
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