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CMA Intermediate · Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

While auditing expenses, the auditor of Vishwas Pharma Ltd. finds that a director's family holiday costing Rs. 3,50,000 was booked as 'staff welfare' and approved by the same director. Which is the most appropriate audit response?

The auditor should treat it as a possible related party and personal expense, seek explanation and evidence, ask management to correct it, and consider reporting if unresolved. Director approval does not make a personal holiday a business expense, and the head of account does not decide the nature of the cost.

  1. ATreat it as a related party matter, seek explanation, and consider adjustment and reporting if it is not a business expenseCorrect
  2. BIgnore it because the amount is approved by a director
  3. CAccept it since staff welfare is a normal expense head
  4. DReclassify it to capital work in progress

Explanation

An expense of a personal nature booked under a misleading head is a misstatement and may involve related parties and management override. The auditor should enquire, obtain evidence, ask for correction and consider the effect on the report. Director approval gives no assurance, and capitalisation has no basis.

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