Fraud and Responsibilities of the Auditor in this Regard – CA Inter Audit Questions bank is designed strictly as per the latest syllabus and exam pattern.
Fraud and Responsibilities of the Auditor in this Regard – CA Inter Audit Question Bank
Question 1.
As an auditor of a Limited Company, you observe that during the month of March, 2009, sales invoices were not recorded in books of accounts. You aLso observe that payment of wages was much higher compare to last year. Keeping In mind above, anaLyse possible ways of manipulation of accounts. (May 2009, 6 marks)
Answer:
Manipulation of Accounts:
Accounts are falsified in order to conceal the true position of the business for some purpose. They are always intentional, for a predetermined purpose and are generally committed either by the owners or top management personnel or senior officers of the business. This type of fraud is generally committed:
- to avoid Incidence of income-tax or other taxes by showing profits at a lower figure.
- to withhold declaration of dividends even there Is adequate profit.
- for receiving higher remuneration where managerial remuneration is payable by reference to profits.
- for delaying a dividend when there are insufficient profits by showing profits at inflated figures.
Such types of frauds are difficult to be detected as they are committed by persons holding positions of trust and use carefully guarded by them. Such frauds are generally of the following nature:
- Recording fictitious purchases or suppression of purchases
- Recording fictitious sales or omission of sales
- Recording fictitious expenses or omission of expenses
- Overvaluation or undervaluation of stock.
- Taking credit for accrued income not likely to be received or omission of income.
- Revenue expenses changed to capital and vice-versa.
SA 240 Auditor’s Responsibility to consider fraud and Error in an Audit of Financial Statements” deals with the auditor’s responsibilities for the detection of material misstatement resulting from fraud and error. It requires a considerable skill and vigilance on the part of an auditor. In doubtful cases he may refuse to believe the information supplied to him by any officer of the concern. An auditor who uses ädequate skill and reasonable care is legally exempt from liability if he fails to discover a well-concealed detection. But an auditor by a skilled auditor should rarely permit such a failure.
All possible opportunities for dishonesty and manipulation of the accounts must be considered and guarded against and the degree of checking and investigation should be determined by the circumstances surrounding the transactions and the effectiveness of the system of intended check in operation.
Question 2.
List out some examples of fraud that can be done by ledger keepers in Bought ledger and Sales ledger. (May 2011, 8 marks)
Answer:
Ledger Keeper and Frauds Examples of frauds that can be done by ledger keeper In Bought
Ledger:
1. Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the amount paid against the credit balance.
2.
- Crediting the account of a supplier by fictitious invoice, showing that certain supplies have been received from the firm, where no goods have been received.
- Crediting the accounts of supplier on the basis of duplicate invoice from a supplier, the original amount where of has already been adjusted to the credit of the supplier in the ßought Ledger.
3. Suppressing a credit note issued by a supplier in respect of return or an allowance and misappropriating an amount equivalent thereto out of the payment made to him. For if a credit note issued by a supplier either in respect of goods returned to him or for an allowance granted by him, is not debited to his account, the balance in his account in the Bought
Ledger would be larger than the amount actually due to him. The ledger. keeper thus will be able to misappropriate the excess amount standing to the supplier’s credit.
Question 3.
Write short note on Detalcation of cash with examples. (2015- May 4 marks)
Answer:
Defalcation of Cash
Defalcation of cash may take place In following ways:
1. By Inflating cash payment
2. By suppressing cash receipts
3. By casting wrong total In the cash book.
The defalcation of cash is occurred due to the transaction affecting the cash balances which are as follows:
- The cash payment made for purchases
- The payment made to supplier for credit purchases
- The payment made for expenses
- Cash in transit in case of consignment.
- Bad debt incurred
- Purchase of fixed assets (PPE)
- Redemption of debentures and buyback of the share capital
- Dividend paid for the year etc.
Question 4.
Examine with reasons whether the following statements are correct or Incorrect:
Satisfactory Control environment is not an absolute deterrent to fraud. (May 2019, 2 marks)
Answer:
This Statement is Correct
The existence of a satisfactory control environment can be a positive factor when the auditor assesses the risks of material misstatement. However, although It may help to reduce the risk of fraud, a Satisfactory control environment Is not an absolute deterrent to fraud.
Question 5.
Thett of an entity’s assets is often perpetrated by employees in relatively small and immaterial amounts. Explain the various ways In which the same can be accomplished? (Jan 2021, 3 marks)
Question 6.
Explain any three ways where cash receipts are suppressed. (Jan 2021, 3 marks)
Question 7.
State with reasons (in short) whether the following statement is True or False:
When an auditor identifies a Misstatement resulting from fraud, it is his responsibility o communicate it to the regulatory and enforcement authorities apart from those charged with governance. (May 2010, 2 marks)
Answer:
True:
According to SA 240 “The Auditor’s Responsibilities Relating to Fraud In an Audit ot Financial Statements”, If an auditor identifies a misstatement resulting from fraud or error, it is his responsibility to communicate the matter with those charged with the governance and, in some circumstances, when so required by laws or regulations, to regulatory and enforcement authorities also.
Question 8.
Discuss the following:
Is detection of fraud and error duty of an auditor? (May 2015, 5 marks)
Answer:
As per SA-240, “The Auditor’s Responsibilities Relating to Fraud In an Audit of Financial Statements”, primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deference, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment.
This Involves a commitment to creating a culture of honesty and ethical behaviour which can be reinforced by an active oversight by those charged with governance. In exercising oversight responsibility, those charged with governance consider the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability.
The primary responsibility for detection of fraud and error is of management only. However, if the auditor finds out any issues or doubts relating to financial statements creating possible frauds and errors then it shall becomes responsibility of the auditor to find out where such fraud exists.
So the auditor’s primary duty is to provide opinion on the financial statement however, it the auditor finds out any frauds or errors of possibility of occurrence then he/she should perform extended audit procedure to find out where such fraud exists.
If the auditor finds any frauds and errors resulting from misstatement then he should communicate the same to the management or he should mention the same In his audit report.
So, we can conclude that it Is not primary responsibility of the auditor to detect and correct fraud and error. However, If he finds any doubt of fraud and error that it will become the duty of auditor to detect the same.
As per SA-200, Overall objectives of the Independent Auditor and the conduct of Audit in accordance with standards on auditing, the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material
respects, In accordance with an applicable financial reporting framework, in the case of most general purpose frameworks, that opinion Is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with SAs and relevant ethical requirements enables the auditor to form that opinion.
The auditor Is not expected to, and cannot, reduce audit risk to zero and cannot, therefore, obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.
Auditors’ Responsibilities Relating to Fraud under Companies Act, 2013
Auditing and investigation under Companies Act, 2013
Audit never undertakes discovery of specific happenings and Is never started with a preconceived notion about the state of affairs. The auditor seeks to report what he finds in the normal course of examination of the accounts adopting generally followed techniques unless circumstances call for a special probe: fraud, error, irregularity whatever comes to the auditor’s notice in the usual course of checking, are all looked into in-depth and sometimes investigation results from the prima fade findings of the auditor.
But as per Sec. 143(1 2) of the Companies Amendment Act, 2015 Not withstanding anything contained in this section, If an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud Involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and In such manner as is prescribed under Rule 13 of Companies (Audit and Auditors) Rules, 2014.
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under Sec. 177 or to the Board in other cases within such time and in such manner as may be prescribed.
Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government. shalt disclose the details about such frauds in the Board’s report in such manner as may be prescribed.
Rules 13 of the Companies (Audit and Auditors) Rules, 2014, describes that in case the auditor has sufficient reason to believe that an offence Involving fraud, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than sixty days of his knowledge and after following the procedure indicated herein below:
(a) Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;
(b) On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days of receipt of such reply or observations;
(c) In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days. he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time.
(d) Thereafter the report shall be sent to the Secretary. Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgment Due or by Speed post followed by an e-mail in confirmation of the same.
(e) This report shall be on the letterhead of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
(f) The report shall be In the form of a statement as specified in Form ADT-4. No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter above if it is done in good faith.
(g) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee constituted under Sect. 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:
- Nature of Fraud with description;
- Approximate amount Involved; and
- Parties involved.
(h) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:
- Nature of Fraud with description;
- Approximate Amount involved;
- Parties involved, it remedial action not taken; and
- Remedial action taken.
Important Note: The provision of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under Sec. 148 and Sec. 204 respectively. If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-Sec. (12) of Sec. 143, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
Question 9.
Write short note on Fraudulent financial reporting (Nov 2015, 4 marks)
Answer
Fraudulent Financial Reporting:
Fraudulent financial reporting Involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users.
It can be caused by the efforts of management to manage earnings in order to deceive financial statement users by influencing their perceptions as to the entity’s performance and profitability.
Such earnings management may start out with small actions or in appropriate adjustments of assumptions and changes in judgments by management. Pressures and incentives may lead these actions to increase to the extent that they result in fraudulent financial reporting.
Such a situation could occur when due to pressures to meet market expectations or a desire to maximize compensation based on performance, management intentionally takes positions that lead to fraudulent financial reporting by materially misstating the financial statements.
In some entities, management may be motivated to reduce earnings by a material amount to minimize tax or lo inflate earnings to secure bank financing.
Fraudulent financial reporting may be accomplished by the following:
Manipulation, falsification or alteration of accounting records or supporting documents from which the financial statements are prepared. Misrepresentation in or intentional omission from the financial statements of events, transactions or other significant information. Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation or disclosure. Fraudulent financial reporting often involves, management overrides of controls that otherwise may appear to be operating effectively.
Question 10.
Write any five circumstances of conflicting or missing evidence that indicate the possibility of fraud. (Nov 2018, 5 marks)
Answer:
The following are the circumstances of conflicting or missing evidence that indicate the possibility of fraud.
Missing documents.
Documents that appear to have been altered. Unavailability of other than photocopied or electronically transmitted documents when documents In original form are expected to exist. Significant unexplained items on reconciliations.
Unusual balance sheet dangers, or changes in trends or important financial statements ratios or relationships, for example, receivables growing faster than revenues. inconsistent, vague, or implausible responses from management or employees arising from inquiries or analytical procedures.
Unusual discrepancies between the entity’s records and confirmation replies. Large numbers of credit entries and other adjustments made to accounts receivable records. Unexplained or inadequately explained differences between the accounts receivable sub-ledger and the control account, or between the customer statements and the accounts receivables sub-ledger.
Missing or non-existent cancelled checks k circumstances where cancelled checks are ordinarily returned to the entity with the bank statement. Missing inventory or physical assets of significant magnitude. Unavailable or missing electronic evidence, inconsistent with the entity’s record retention practices or policies. Fewer responses to confirmations than anticipated or a greater number of responses than anticipated. Inability to produce evidence of key systems development and program change testing and implementation activities for current-year system changes and deployments.
Question 11.
State with reasons (in short) whether the following statement is correct or incorrect: Fraud against the company shall be reported by the auditor to the Central Government within 45 days of his knowledge. (May 2017, 2 marks)
Answer:
Incorrect:
As per Rule 13(1) of Companies (Audit and Auditors) Rules, 2014,
1. If an auditor of a company, ¡n the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves otis expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government. [Rule 13(1)]
2. The auditor shall report the matter to the Central Government as under:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations all the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations. [Rule 13(2)]
Question 12.
As an auditor of POR Ltd., you came across a misstatement resulting from fraud or suspected fraud which brings Into question your ability to continue performing the audit. Explain the courses of actions available to you. (Nov 2020, 4 marks)
Question 13.
Mr. A is appointed as statutory auditor of a company for the Financial Year ended 31st March, 2018. During the course of audit, it was found that few doubtful transactions had been committed by finance manager who retired in March, 2018. The fraud was going on since last 2-3 years and the total amount misappropriated exceeding ₹ 100 lakhs. As a statutory auditor, what would be reporting responsibilities of Mr. A? (May 2018, 5 marks)
Answer:
Provision
As per Sec. 143(12) of the Companies Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud, lch involves or is expected to involve individually an amount of one crore rupees or above is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.
Present Case:
In the instant case, a fraud had been committed by a general manager and the amount Involved of such misappropriation Is exceeding to ₹ 1oo lakhs i.e. ₹ 1 crore. Therefore, reporting of fraud should be done to Central Government in accordance with Sec. 143 (12) of the Act.
The manner of reporting the matter to the Central Government is as follows:
(i) the auditor shall report the matter to the Board or the Audit Committee as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
(ii) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
(iii) in case the auditor fails to get reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of bis report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations:
(iv) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a Sealed cover by Registered Post with acknowledgment due or by Speed Post followed by an email in confirmation of the same;
(v) the report shall be on the letterhead of the auditor containing postal address, e-mail address and contact telephone number or mobile number and signed by the auditor with his seal and shall indicate his Membership Number; and
(vi) the report shall be in the form as statement as in Form ADT-4
Multiple Choice Question
Question 1.
‘The auditor’s responsibilities relating to fraud in an Audit of Financial Statement” defines under
(a) SA- 200
(b) SA – 250
(c) SA-230
(d) SA-240
Answer:
(d) SA-240
Question 2.
Fraud is an intentional act by one or more Individuals among management, TCWG. employees or third parties, Involving trie use of deception to obtain
(a) legal advantage
(b) illegal advantage
(c) an unjust
(d) an unjust or illegal advantage
Answer:
(d) an unjust or illegal advantage
Question 3.
The auditor is concerned with fraud that causes a ………………….. in the financial statements.
(a) fraudulent effect
(b) errors and omissions
(c) misstatement
(d) material misstatement
Answer:
(d) material misstatement
Question 4.
Intentional misstatements relevant for an auditor –
(a) misstatements resulting from misappropriation of assets
(b) misstatements resulting from fraudulent financial reporting
(c) Only (a)
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)
Question 5.
Fraud causes a material misstatement in the financial statements involve
(a) Fraudulent Financial Reporting
(b Misappropriation of Goods
(c) Defalcation of Cash
(d) All of them
Answer:
(d) All of them
Question 6.
Fraudulent financial reporting may by accomplished by
(a) Manipulation or Falsification or Alteration including forgery
(b) Intentional Misapplication of accounting principles
(c) Misrepresentation or Intentional Omission
(d) Any of then
Answer:
(d) Any of then
Question 7.
Defalcation of cash anses when
(a) Inflating Cash Payment
(b) Suppressing Cash Receipts
(c) Casting Wrong Totals in the Cash Book
(d) Any of the above
Answer:
(d) Any of the above
Question 8.
As per SA – 240 “The Auditor’s Responsibilities Relating to Fraud in the Audit of Financial statements, the primary responsibility for the prevention and detection of fraud rests with
(a) Auditor
(b) Management
(c) Those charged with governance
(d) Both TCWG and Management
Answer:
(d) Both TCWG and Management
Question 9.
For detection of fraud and error auditor should ………………. .
(a) overview specific areas
(b) analyse meticulously
(c) analyse superficially
(d) appoint internal auditor for verifications.
Answer:
(b) analyse meticulously
Question 1o.
An auditor conducting an audit in accordance with SA is responsible for obtaining reasonable assurance that the financial statement are free from
(a) Fraud & errors
(b) MisappropriatiOns
(c) Misstatements
(d) Material misstatement, whether caused by fraud or error
Answer:
(d) Material misstatement, whether caused by fraud or error
Question 11.
Teeming and lading is one of the techniques of inflating cash payments.
(a) True
(b) False
(c) Partially True
(d) None
Answer:
(b) False
Question 12.
…………………. many be defined as events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.
(a) Fraud Factors
(b) Errors Factors
(c) Risk Factors
(d) Fraud Risk Factors
Answer:
(d) Fraud Risk Factors
Question 13.
If, as a result of a misstatement resulting from fraud, the auditor encounters exceptional circumstances that bring into question his abdity to continue performing the audit, he shall:
(a) Ask the management for his withdrawal
(b) Withdraw from the engagement immediately
(c) Report to audit team regarding withdrawal
(d) Determine the professional and legal responsibilities applicable in the circumstances
Answer:
(d) Determine the professional and legal responsibilities applicable in the circumstances
Question 14.
Misappropriation of assets may occur because there is:
(a) Adequate record-keeping with respect to assets
(b) Lack of complete and timely reconciliations of assets
(c) Dispute between shareholders i a closely hefd entity
(d) Known history of violations of securities laws.
Answer:
(b) Lack of complete and timely reconciliations of assets
Question 15.
Adverse Relationships may be created by
(a) Known or anticipated future employee Layoffs
(b) Recent or anticipated changes to employee compensation or benefit plans
(c) Promotions, compensation, or other rewards inconsistent with expectations
(d) All of the above.
Answer:
(d) All of the above.
Question 16.
In which situation possibility of fraud arises
(a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic or unusual relationship between Auditor and management.
(d) Any of the above situation
Answer:
(d) Any of the above situation
Question 17.
Unsupported or unauthorised balances or transactions Is the example of:
(a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic relationship between auditor and management
(d) Non-compliances of standards of audit.
Answer:
(a) Discrepancies in accounting records
Question 18.
Unusual delays by the entity in providing requested Information is an example of:
(a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic relationship between auditor and management
(d) Non-compliances of standards of audit.
Answer:
(c) Problematic relationship between auditor and management
Question 19.
As per ……………………. the primary responsibility for tIe prevention and detection of fraud rests with management
(a) SA-200
(b) SA-210
(c) SA-220
(d) SA-240
Answer:
(d) SA-240
Question 20.
A Reporting of Fraud involving amount of less than I crore rupees:
Auditor to report Board/Audit Committee
(a) within 2 weeks of knowledge of fraud
(b) within 1 weeks of knowledge of fraud
(c) within 2 days of knowledge of fraud
(d) within 10 day of knowledge of fraud.
Answer:
(c) within 2 days of knowledge of fraud
Question 21.
Reporting of fraud to the Central Government governed under.
(a) Section 143(12) of Companies Act, 2013
(b) Section 143 sub-section 13 of Companies Act, 2013
(c) Rule 13 of the Companies (Audit and Auditors) Rules. 2014
(d) (a) & (c) both
Answer:
(d) (a) & (c) both
Question 22.
The auditor should Report
(a) Nature of fraud with description
(b) Approximate amount involved
(c) Parties involved
(d) All of the above.
Answer:
(d) All of the above.
Question 23.
Company is bound to disclose certain specltied detaiLs in Board’s Report as
(a) Nature of fraud with description
(b) Approximate amount rivolved
(c) Parties involved and Remedial action taken
(d) All of the above
Answer:
(d) All of the above
Question 24.
Reporting of Fraud involving amount of rupees 1 crore or above: The auditor shall report the matter to the …………….. Board or audit committee with 2 days of his knowledge of the fraud, and seeking their reply or observation
(a) within 2 days
(b) within 15 days
(c) within 30 days
(d) within 45 days
Answer:
(d) within 45 days
Question 25.
As per Rule 13 of CAAR 2014, if an auditor received the reply or observation from Board or Audit Committee within stipulated time, the audit is required to forward report along with reply/observation and comments to.
(a) TCWG with 15 days
(b) Shareholders withIn 30 days
(c) Central state Govt. Within 15 days
(d) Central Government within 15 days
Answer:
(d) Central Government within 15 days