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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

While planning the audit of Kaveri Textiles Ltd, the engagement team discusses where the financial statements might be susceptible to material misstatement due to fraud. The engagement partner insists that the discussion be held even though the team has audited the company for six years without finding any fraud. Which of the following best describes the auditor's correct approach under SA 240 and SA 315?

The team must hold the discussion and maintain professional skepticism, setting aside past beliefs about management's honesty. SA 240 and SA 315 require the engagement team to discuss how and where the financial statements may be susceptible to material misstatement due to fraud, whatever the earlier audit history.

  1. ASkip the discussion because past audits revealed no fraud
  2. BHold the discussion, maintaining professional skepticism and setting aside prior beliefs about management's honestyCorrect
  3. CHold the discussion only with the client's management, not within the engagement team
  4. DRestrict the discussion to errors, since fraud is the responsibility of those charged with governance

Explanation

SA 315 and SA 240 require the engagement team to discuss the susceptibility of the entity's financial statements to material misstatement, including fraud. The auditor must maintain professional skepticism and not rely on past experience of management's honesty. Skipping the discussion because of a clean history is wrong because the requirement is mandatory and the history does not remove the risk.

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