Page 23 - CA Final PARAM Digital Book.

o Altering records and terms related to significant and unusual transactions
(E.g., MBA fees paid for children of directors was shown as employee
development expenses)

• Define Misapplication—Intentional Misapplication of Accounting
Principles –Then explain 2 ways of doing it – Adjusting Assumptions
/ Engaging in Complex Transactions to Misrepresent

Intentional misapplication of accounting principles relating to amounts,
classification, manner of presentation, or disclosure.

Examples
o Inappropriately adjusting assumptions and changing judgments used to
estimate account balances. (E.g., Suddenly increasing useful life to reduce
depreciation & increase profits, Increasing % completion of WIP to increase
profits)
o Engaging in complex transactions that are structured to misrepresent the
financial position or financial performance of the entity. (E.g., loan taken
& repaid was structured into sale & repurchase, loan taken was shown as
lease (which is finance lease)

➢ As per Sec 143 (12)- Reason to Believe – Fraud by of Officer or Employee on the
company—report to CG (if fraud >=1 crore) or to Audit Committee , BOD (if fraud
is less than 1 crore)
Further, as per section 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 involving fraud
is being or has been committed against the company by officers or employees of the company, he
shall immediately report the matter to the Central Government (in case amount of fraud is Rs 1
crore or above) or Audit Committee or Board in other cases (in case the amount of fraud involved
is less than Rs 1 crore) within such time and in such manner as may be prescribed.

➢ Clause (xi) of CARO 2020 - Report on fraud by/on the company noticed or reported.
whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, the nature and the amount involved is to be indicated;

QNO Fraud Risk Factors (MISSAPPROPRIATION OF ASSETS) Old Course-(N21E, M23M)
11.000 TITANIUM CNO - SA240.220 / SA240.240 / SA240.260
M/s Kumar & Co., Chartered Accountants were appointed as statutory auditors of PC limited for the
financial year 2020-21. During the course of audit, one of the partners CA Kumar observed that there is
misappropriation of assets in the form of theft of entity's inventory and is perpetrated by employees in
relatively small and immaterial amounts. CA Kumar is concerned with the existence of certain
circumstances for increasing the susceptibility of assets to misappropriation. Guide CA Kumar with respect
to Risk factors related to misstatements arising from misappropriation of assets with reference to relevant
Standard on Auditing.
Answer Guidance to CA Kumar with respect to risk factors that relate to misstatements arising from
misappropriation of assets as per SA 240 is:
As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an audit of Financial Statements”,
misappropriation of assets involves the theft of entity’s assets and is often perpetrated by employees
in relatively small and immaterial amounts. However, it can also involve management who are usually
more able to disguise or conceal misappropriations in ways that are difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways including stealing physical assets
or intellectual property (for example, stealing inventory for personal use or for sale, stealing scrap for
resale, colluding with a competitor by disclosing technological data in return for payment).

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