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

While auditing Rathore Textiles Ltd, CA Meera notices that several payments to a vendor were each kept just below the Rs 5 lakh limit that needs board approval, and the vendor is owned by the brother-in-law of the purchase manager. Management says the amounts are small. Under SA 240, which conclusion is most appropriate for the auditor?

The pattern of payments just below the approval limit to a connected vendor is a fraud risk indicator. Under SA 240 the auditor should apply professional scepticism, extend procedures and consider reporting implications. Small individual amounts do not justify ignoring it, nor does it prove fraud.

  1. AThe pattern is a fraud risk indicator, so she should apply professional scepticism, extend procedures, and consider the effect on the audit and on reportingCorrect
  2. BIgnore it because each payment is individually below materiality
  3. CConclude that fraud has definitely occurred and issue an adverse opinion at once
  4. DLeave it to the internal auditor and take no action in the statutory audit

Explanation

Splitting payments to avoid approval limits, together with a possible related-party link, is a fraud risk indicator. SA 240 requires professional scepticism and further procedures, and consideration of reporting. Individual payments being small does not remove the risk, because materiality also has qualitative aspects. Definite conclusions of fraud and an immediate adverse opinion are premature.

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