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

While auditing Kaveri Textiles Ltd, CA Rohan finds that a sales invoice was backdated, and the amount involved is material. His discussion with the CFO suggests the backdating was deliberate. Which statement best describes Rohan's position under SA 240?

The auditor may suspect or, in rare cases, identify fraud, but does not make legal determinations of whether fraud has actually occurred. Fraud is a broad legal concept, and the auditor is concerned with fraud causing material misstatement in the financial statements. The auditor therefore responds through audit procedures and reporting, not legal conclusions.

  1. AHe must conclude legally that fraud has occurred and report it as a criminal offence on his own authority
  2. BHe may suspect or, in rare cases, identify fraud, but he does not make legal determinations of whether fraud has actually occurredCorrect
  3. CHe may ignore the matter because fraud detection is solely the responsibility of management
  4. DHe must treat the matter as an error, since only courts can decide whether an action is intentional

Explanation

SA 240 states that although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred. The option calling for a legal conclusion is wrong because that is outside the auditor's role. Treating it as error is also wrong, because intent is what distinguishes fraud from error and it is a matter the auditor must keep considering.

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