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

While auditing Kaveri Textiles Ltd, CA Meera finds that a purchase ledger balance has been deliberately overstated by a senior accounts executive. The amount is material. Which statement best describes her responsibility regarding the nature of this finding?

The auditor may suspect or, rarely, identify fraud but does not make legal determinations about whether fraud has actually occurred. Fraud differs from error by intent, and the auditor's concern is material misstatement in the financial statements, not legal adjudication of guilt.

  1. AShe should conclude that fraud has legally occurred and record a legal finding of guilt in her report
  2. BShe should treat it as an error because the amount arises from an accounting entry
  3. CShe may suspect or identify fraud, but she does not make legal determinations of whether fraud has actually occurredCorrect
  4. DShe should ignore the matter as fraud is solely the concern of management and law enforcement

Explanation

SA 240 says that although the auditor may suspect or, in rare cases, identify fraud, the auditor does not make legal determinations of whether fraud has actually occurred. The distinguishing factor between fraud and error is intent, so the entry is not simply an error. Concluding legal guilt goes beyond the auditor's role, which makes the first option wrong.

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