Page 28 - CA Final PARAM Digital Book.

identifying the deficiencies of internal control over the revenue recognition process and should have
treated the risk of improper revenue recognition as a significant risk. Also, as per Section 143(12), the
auditor is required to report all the frauds identified during the course of the audit involving amounts
above ₹ 1 crore within the prescribed time frame to the Central Government

QNO No Documentary or Other Evidence Old Course - (N13E, N16R, PM17, PM17, N18R,
17.000 TITANIUM CNO -- Unique M20M)
th
Intelligent Ltd entered into an agreement with Mr Intellectual on 15 March, 2016, whereby it agreed to
pay him Rs 2 lakhs per month as retainership fee for consultation in IT department However, no amount
was actually paid and Rs 24 lakhs was provided in the Statement of Profit and Loss for the year ending on
st
31 March, 2016 Management of the company uttered that need-based consultation was obtained
throughout the year However, on investigation, no documentary or other evidence of receipt of such
service was found As the auditor of Innocent Ltd, what would be your approach?
OR
th
On 15 March 2020, the directors of Phony Ltd. instructed their accountant to enter purchases amounting
th
Rs. 1.02 crores from a company incorporated dated 11 March 2020. However, no amount was actually
st
paid and Rs. 1.02 crore was provided in the books of account as purchases for the year ending on 31
March 2020.

On inspection, no documentary or other evidence of such purchases was found. As the auditor of Phony
Ltd., what would be your approach regarding reporting of such bogus purchases?

Answer Reporting of Fraud Committed by Management/Directors of the Company: As per SA 240 on “The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements”, fraud can be committed by
management overriding controls using such techniques as recording fictitious journal entries, particularly
close to the end of an accounting period, to manipulate operating results or achieve other objectives.

In the given case, Phony Ltd. has made purchases amounting Rs. 1.02 crores, at year-end. It also debited the
sum in the books of account, however, no documentary or other evidence of such purchases was found, on
investigation. It is clear that company has passed fictitious journal entries, near year-end, to manipulate the
operating results.

Accordingly, the auditor would adopt the approach which will be based on the result of misstatement on the
basis of such fictitious journal entry, i.e. if, as a result of a misstatement resulting from fraud or suspected
fraud, the auditor encounters exceptional circumstances that bring into question the auditor’s ability to
continue performing the audit, the auditor shall 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; or the
auditor may consider for appropriateness of withdrawal from such engagement, where withdrawal from the
engagement is legally permitted.

In addition, the auditor is required to report according to section 143(12) of the Companies Act, 2013. As per
section 143(12), 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, which involves or is expected to involve individually an amount
of Rs. 1 crore or above is being or has been committed in the company by its officers or employees, he shall
report the matter to the Central Government in prescribed manner.

The auditor is also required to report under clause (x) of paragraph 3 of Companies (Auditor’s Report) Order,
2016, whether any fraud by the company or any fraud on the Company by its officers or employees has been
noticed or reported during the year. If yes, the nature and the amount involved is to be indicated.

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