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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reports to those charged with governance and management

While auditing Calder Ltd, the auditor discovers that the finance director has been overriding controls to record fictitious sales, and the auditor suspects the managing director may also be involved. The board comprises the managing director, the finance director and two non-executive directors. Under ISA 240 and ISA 260, to whom should the auditor communicate the matter?

The auditor should communicate directly with the non-executive directors or other TCWG, because fraud involving management is suspected. Telling only the managing director or finance director would be inappropriate as they may be implicated, and disclosing to the bank would breach confidentiality.

  1. AOnly to the managing director, as the senior executive
  2. BOnly to the finance director, since the fraud is in their area
  3. CDirectly to the non-executive directors or others in TCWG, since management involvement is suspectedCorrect
  4. DTo the company's bankers first, to protect third parties

Explanation

ISA 240 requires communication of fraud involving management to TCWG on a timely basis. Where management involvement is suspected, communicating only to management would be inappropriate, so the auditor should communicate with the non-executive directors. Disclosure to third parties such as bankers would breach confidentiality unless a legal duty or right exists.

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