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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

While auditing Ganga Foods Pvt. Ltd., CA Meera finds that the finance head hid a related-party loan from her by forging board minutes. She did not detect it, though she planned and performed the audit per the SAs with professional scepticism. Which statement is correct?

She is not necessarily in breach. An audit planned and performed in accordance with the Standards on Auditing may still miss a material misstatement, especially fraud involving forgery or collusion. This is an inherent limitation, and non-detection alone does not prove negligence.

  1. AShe is automatically guilty of negligence because a material misstatement remained undetected
  2. BShe is not necessarily in breach, since an audit properly planned and performed per SAs may still fail to detect a material misstatement due to fraud involving collusion or forgeryCorrect
  3. CShe must withdraw her report since fraud makes the audit invalid
  4. DThe audit would have been valid only if she had examined 100% of transactions

Explanation

Fraud involving forgery or concealment is harder to detect than error. If the audit was planned and performed in accordance with SAs, failure to detect is an inherent limitation, not by itself negligence. Option A ignores this; 100% checking is not required.

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