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CA Final · Advanced Auditing, Assurance and Professional Ethics · General Auditing Principles and Auditors Responsibilities

While auditing Kaveri Textiles Ltd, CA Meena finds that a sales cut-off error has overstated revenue. The entries appear to have been made deliberately by the finance head to hit a bonus target. Under SA 240, which statement best describes her position?

The auditor addresses fraud that causes material misstatement and may suspect or identify it, but does not make legal determinations of whether fraud has actually occurred. Intent distinguishes fraud from error, so deliberate manipulation is relevant to the audit, yet a legal conclusion is not the auditor's role.

  1. AShe must conclude legally that fraud has occurred and report it to the police
  2. BShe is concerned with fraud causing material misstatement, and although she may suspect or identify fraud, she does not make legal determinations of whether fraud has actually occurredCorrect
  3. CShe should ignore the matter because intentional misstatements are outside the audit scope
  4. DShe should treat the matter as error because intent cannot be considered in an audit

Explanation

SA 240 states that the distinguishing factor between fraud and error is intent, and that the auditor may suspect or identify fraud but does not make legal determinations of whether fraud has actually occurred. Option A is wrong because it requires a legal conclusion. Option D is wrong because intent is exactly what separates fraud from error.

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