Page 446 - CA Final PARAM Digital Book.

QNO Second Schedule, Part I,Cl,7 --Failed to Discover Fraud Old Course-- (N10R, M14R, PM17, M18E, N21E)
756.000 TITANIUM CNO – PE.1540
The Cashier of a company committed a fraud and absconded with the proceeds thereof. This happened
during the course of the accounting year. The Chief Accountant of the company also did not know about
fraud.

In the course of the audit, at the end of the year, the auditor failed to discover the fraud. After the
audit was completed, however, the fraud was discovered by the Chief Accountant. Investigation
made at that time indicates that the auditor did not exercise proper skill and care and performed his
work in a desultory and haphazard manner. With this background, the Directors of the company
intend to file disciplinary proceedings against the auditor.

Discuss the position of the auditor with regard to the disciplinary proceedings.
OR
You were the statutory auditor of Speed Ltd., a PSU, for the year 2016-17. In the course of your audit,
you did not observe any fraud having been committed during that year. However, the C & AG audit staffs
during their routine inspection found that chief cashier of the Company have committed a fraud in
Debtor s ledger and absconded with the amount. Investigation made in the fraud revealed that the
Auditor did not exercise proper skill and care and performed his working an improper way.

Director of the Company intends to file disciplinary proceedings against the Auditor with the ICAI.
Discuss the position of the auditor with regard to the disciplinary proceedings under Chartered
Accountants Act, 1949 and Regulations there to.
Answer Part I -- Relevant Standards & Laws
▪ Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
▪ SA 240, “The auditor’s responsibilities relating to fraud in an audit of financial statements”
Part II -- Requirements of Relevant Standards & Law
➢ Clause (7) of Part I of the Second Schedule
• Failure to Exercise Reasonable Care and Skill: Apparently, as it appears from the facts
of the case that the auditor did not exercise proper skill and care and that he performed
his work in a desultory and haphazard manner. In this matter, the test for auditor’s
liability lies in whether he has applied reasonable care, skill and caution called for in the
circumstances of the case and whether he reasonably used all the information that he
came across in the course of audit.
• Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949 requires
that it is the duty of an auditor to bring to bear in the work he has to perform that skill,
care and caution as per the circumstances in an honest and reasonable manner.

➢ SA 240, “The auditor’s responsibilities relating to fraud in an audit of financial
statements”
As per SA 240, “The auditor’s responsibilities relating to fraud in an audit of financial statements”,
it can be concluded that the auditor did not plan and perform the audit with an attitude of
professional scepticism.
Part III – Case Discussion
➢ Cash is a very significant item in any situation and the fact that the cashier had left during the year
without notice should have placed the auditor on alert as regards the cash book. In fact, the very
fact that the cashier was absconding, i.e., left without any notice constituted sufficient
circumstances to excite suspicion of the auditor to probe to the bottom.

Thus, having regard to SA 240 and a fraud has actually taken place during the year, committed by
the absconding cashier, it is reasonable to think that prima facie there is a case against the auditor
for gross negligence.
Part IV – Conclusion
➢ As it appears from the facts of the case, the auditor has been grossly negligent in performing his
duties which constitutes professional misconduct. Thus, such instances require reference to
Disciplinary Committee of the Council of the Institute.

If a member is found guilty by the Council of any of the acts or omissions stated in the Schedule, its
finding with recommendations are to be referred to the High Court for decision.

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