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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional and ethical developments

While auditing Marlow Plc, a senior team member discovers evidence that the finance director may have manipulated inventory valuations to meet bonus targets. Under the IESBA Code's provisions on responding to non-compliance with laws and regulations (NOCLAR) and ISA 240, what should the auditor do first?

The auditor should first obtain an understanding of the suspected manipulation and discuss it with management at an appropriate level or with those charged with governance, so they can investigate and correct it. Further steps such as external reporting or withdrawal depend on their response. Fraud by management is never ignored because of size.

  1. ADiscuss the matter with management at the appropriate level, or those charged with governance, to understand it and let them take corrective actionCorrect
  2. BImmediately report the finance director to the regulator without any discussion
  3. CWithdraw from the engagement without further enquiry
  4. DIgnore the matter if the inventory misstatement is below overall materiality

Explanation

The NOCLAR approach requires the auditor to obtain an understanding of the matter and then discuss it with management and those charged with governance, so they can rectify or mitigate it, and then assess their response. Reporting externally or withdrawing may follow if the response is inadequate. Fraud involving management is also qualitatively significant, so ignoring it because of quantity is wrong.

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