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CA Final · Advanced Auditing, Assurance and Professional Ethics · Due Diligence, Investigation & Forensic Accounting

While auditing Kaveri Textiles Ltd, CA Rohan notices that the purchase manager approved orders for a vendor whose address matches the manager's residence, and payments to this vendor rose sharply near the year end. Management says it is a coincidence. As per SA 240, what is the appropriate response of the auditor?

The auditor should treat the matching address and rising payments as a fraud risk indicator, perform further procedures on the vendor and transactions, and communicate with management and those charged with governance. Accepting management's explanation, resigning immediately or going to the police first would be inappropriate.

  1. AAccept management's explanation since fraud detection is solely management's responsibility
  2. BImmediately resign from the engagement without any communication
  3. CTreat it as a possible fraud risk indicator, perform further procedures on the vendor and the transactions, and communicate with those charged with governance as appropriateCorrect
  4. DReport the matter to the police directly without informing management or those charged with governance

Explanation

SA 240 requires professional skepticism and further audit procedures when circumstances indicate possible fraud. Management's uncorroborated explanation is not sufficient evidence. The auditor then communicates with the appropriate level of management and those charged with governance, so the other actions are premature or inappropriate.

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