Page 26 - CA Final PARAM Digital Book.

QNO Responsive Audit Procedures New Course – (SM23)
11.300 TITANIUM CNO-- SA 240.380

"My Décor Limited, presently engaged in manufacturing of fabrics, wants to set up a new plant for
manufacturing of special kind of fabric providing an altogether different texture and feel. This kind of
fabric has become a hit with retail customers. The company needs to set up plant for manufacturing the
above kind of fabric involving huge capital outlays to stay competitive in the market.

You are auditor of the company and find that company’s revenue has increased in financial year 2022-23
to ₹ 1000 crore from ₹ 750 crore in last year. By the time, you started the audit, there was no change in
plant capacity and information regarding need to set up new plant has become known to you during
inquiry of company’s personnel.

Discuss, how you should proceed to deal with above situation, as auditor of the company, paying special
attention to risk of material misstatement due to fraudulent financial reporting?"
1. SA 240: Reference to SA 240, its full name & its applicable in the given scenario.
2. Concept: CNO SA 240.380 Audit procedures responsive to assessed risks of material misstatement due
to fraud at the assertion level
Audit Procedure for Fraud at assertion Level: The auditor should design and perform audit procedures
that are responsive to the assessed risks of material misstatement due to fraud at the assertion level.
The nature, timing, and extent of audit procedures may be altered to obtain more reliable and relevant
audit evidence or additional corroborative information.

Example: For instance, if management feels pressure to meet earnings expectations, there's a risk they
could inflate sales via sales agreements that prevent revenue recognition or pre-delivery invoicing. The
auditor might then design external confirmations to validate not just outstanding amounts, but also the
specifics of sales agreements such as date, return rights and delivery terms. Additionally, the auditor
may find it useful to ask non-financial personnel about any changes in these sales agreements and
delivery terms.

3. Case Discussion: Discuss given Case.
4. Conclusion: Considering both the issues auditor should consider it as RMM due to fraud at assertion
level. Modify Audit Procedures to include TOC, SAP, CAAT to confirm existence of fraud.

QNO Exceptional Circumstances Challenging Ability to Continue New Course – (SM23)
11.310 TITANIUM CNO-- SA240.440
MN & Associates are the statutory auditors of ABC Ltd. for the FY 2021-22. During the course of audit, the
engagement partner, Mr. Manohar notices a misstatement resulting from a suspected fraud that brings
into question the audit team’s ability to continue performing the audit. How should the audit team deal
with the situation?
Answer
During the course of audit, the engagement partner, Mr. Manohar notices a misstatement resulting from a

suspected fraud that brings into question the audit team’s ability to continue performing the audit. In such
a situation the audit team should:

(a) Determine the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities;

(b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the
engagement is legally permitted; and

(c) If the auditor withdraws: -
(i) Discuss with the appropriate level of management and those charged with governance, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal and

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