ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error
While auditing Brightwell Plc, auditor Lena identifies that the chief executive instructed accounts staff to post unusual late journal entries increasing profit to meet a bank covenant. Lena has obtained evidence that the fraud is material. Which action is most appropriate under ISA 240 and the IESBA Code?
Lena should communicate the matter promptly to those charged with governance, assess the effect on her audit opinion, consider her legal and ethical duties to report under the IESBA Code, and consider taking legal advice. Relying on the implicated chief executive or resigning silently would be inadequate.
- ADiscuss only with the chief executive and accept her assurance that no further entries will be made
- BCommunicate on a timely basis with those charged with governance, consider the effect on the audit opinion and her ethical and legal reporting duties, and consider seeking legal adviceCorrect
- CResign immediately without informing anyone, to avoid involvement in the fraud
- DIgnore it because the covenant is a matter for the bank, not the auditor
Explanation
Where management is involved in fraud, the auditor communicates with those charged with governance (not just the implicated person), evaluates the impact on the audit opinion, and considers responsibilities under law and the IESBA Code (NOCLAR) including whether disclosure to an authority is required or appropriate. Legal advice is appropriate. Relying on the implicated CEO is inadequate, and silent resignation fails reporting responsibilities.
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