Page 22 - CA Final PARAM Digital Book.

Part 1- SA 240

QNO Fraudulent Financial Reporting Old Course -(M12E, PM17,N20E,N21M)
10.000 TITANIUM CNO - SA240.060
In the course of audit of A Ltd you suspect the management has indulged in fraudulent financial reporting.
State the possible source of such fraudulent financial reporting.
OR
In the course of audit of Quick Ltd, you suspect that the management has made misstatements in the
financial statements intentionally to deceive the users and to succumb to pressures to meet market
expectations. Elucidate how the fraudulent financial reporting may be accomplished and also discuss the
techniques of committing fraud by management overriding controls.
Answer Part I -- Relevant Standards & Laws
▪ SA 240, The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements
▪ Sec 143 (12) of Companies Act
▪ Clause (XI) of CARO 2020
Part II -- Requirements of Relevant Standards & Laws
➢ As per SA 240
• Definition of FFR – Intentional Misstatements to Deceive Users

Fraudulent Financial Reporting involves intentional misstatements or omissions of amounts
or disclosures in financial statements to deceive financial statement users.
• Three Ways of FFR
Fraudulent financial reporting may be accomplished by the following:

• Define Omission – Intentional Omission of Events, Transactions or
Other Significant Information -- Then explain 2 ways of doing it -
- By Omitting, Delaying, Advancing Transactions / Concealing, Not
Disclosing Facts)
Misrepresentation in or intentional omission from, the financial statements of
events, transactions or other significant information.
Examples
o Omitting, advancing or delaying recognition in the financial statements of
events and transactions that have occurred during the reporting period.
(E.g., delaying recording of claims received from suppliers for late
payment, from employees regarding compensation etc)
o Concealing, or not disclosing, facts that could affect the amounts recorded
in the financial statements. (E.g. Did not disclose that increase in share
capital is through bonus issue and not due to fundraising, did not disclose
that increase in fixed assets is due to upward revaluation)

• Define Manipulation – Includes falsification, forgery, alteration of
records & documents – Then explain 2 ways of doing it – Fictitious
Journal Entries/ Altering Records)
Manipulation, falsification (including forgery), or alteration of accounting records
or supporting documentation from which the financial statements are prepared.
Examples
o Recording fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other
objectives. (E.g., Passing accounting entry for payments to creditors to
improve current assets ratio, Recording fake sale entries etc)
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