Page 25 - CA Final PARAM Digital Book.

QNO Evaluation of Fraud Risk Factors New Course – (SM23)
11.200 TITANIUM CNO-- SA240.280
CA. Ridhima, internal auditor of Track Store Limited, has pointed out following deficiencies in internal

control of the company, in her reports: -

i. Receivables are not reconciled at stipulated intervals.
ii. Customers are provided a credit limit based upon their track record. However, no review of

customer credit limits is undertaken at required intervals.

The statutory auditor of the company finds that no action has been taken by the company on the said
deficiencies pointed out in reports of internal auditor.

What does above situation allude to statutory auditor of company?
Answer Management failing to remedy known significant deficiencies in internal control on a timely basis is a fraud
risk factor for misstatements arising from fraudulent financial reporting.

When management does not correct significant deficiencies in internal control on a timely basis, it reflects
an attitude, character or set of ethical values that allow them knowingly and intentionally to commit a
dishonest act.

Failure to rectify known control deficiencies pertaining to reconciliation of receivables and review of
customer credit limits has the potential to fraud. Lack of timely reconciliation of receivables may lead to
intentional misstatements. Further, non-reviewing customer limit may lead to grant of credit beyond
creditworthiness of customers. It may result in intentional tying up of company’s funds with risky customers
due to collusion.

The above situation is a fraud risk factor for fraudulent financial reporting.

QNO Identifying & evaluating Fraud risk factors New Course – (SM23)
11.220 TITANIUM CNO-- SA240.280
You are auditor of a social media company. Of late, government has tightened noose around companies

operating in this segment by bringing in a maze of regulatory legislations to protect interests of users.
How you can proceed to verify that company is compliant with new regulatory requirements? Besides,
what does above situation underscore to you as an auditor?
1. SA 240 & 250: Reference to SA 240 & 250, its full name & its applicable in the given scenario.
2. Concept: SA 250 - Verification process for applicability of new Law.SA 240 – Identifying & evaluating
Fraud risk factors.
3. Case Discussion: Discuss Point 1 & 2 & explain the case.
4. Conclusion: Auditor should follow above discussion

1. SA 250 - Verification process for applicability of new Law.:
▪ Ensure the company has systems and procedures to meet new regulations.
▪ Examine company-developed policies and procedures, such as:
o System of internal control.
o Employee sensitization regarding new rules.
o Engagement of legal advisors.
2. SA 240 – Identifying & evaluating Fraud risk factors.:
▪ New regulations might threaten the company's financial stability.
▪ Management could be under pressure.
The situation presents fraud risk factor. Which the auditor should evaluate.

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