Page 147 - CA Inter MCQ Book

CA RAVI TAORI CA INTER AUDIT MCQs

57 (M22M)
Honest Limited is a listed Company engaged in the construction business. The Company constructs
residential buildings after purchasing vacant land and then sells ready flats to customers. The Company
has not been earning good profits and so no dividend was declared in the last financial year for which
the statutory audit is to be conducted.

XYZ & Company has been appointed as the statutory auditor of Honest Limited. The audit firm has seven
partners and is a reputed firm with the partners having expert knowledge in various areas. While
conducting the audit, the engagement partner, CA Z suspects some fraudulent activities undertaken
by the officers and employees of the Company. CA Z is aware that for the purpose of SAs, the auditor is
concerned with fraud that causes a material misstatement in the financial statements. He understands
that misstatements in the financial statements can arise from either fraud or error.

On detailed verification by the audit team, it was observed that accounts were manipulated with a view
to presenting a false state of affairs. The fraud was committed to avoid incidence of income -tax and
withhold declaration of dividend. There was also an incidence of cash receipts being suppressed which
came to the notice of the audit team.

CA Z had enough reasons to believe that the offence of fraud, involved individually an amount of Rs.1
crore, and had been committed against the company by its officers or employees. The audit team
discussed the reporting requirements of the fraud committed.

One of the audit team members puts forward his recommendations on reporting which includes
disclosure in the Board’s Report. He states that sub-section (12) of section 143 of the Companies Act,
2013 prescribes that the companies, whose auditors have reported frauds under this sub-section (12) to
the audit committee or the Board, but not reported to the Central Government, shall disclose the details
about such frauds in the Board’s report in such manner as may be prescribed.

CA Z discusses the reporting under Companies (Auditor’s Report) Order, 2020 [CARO, 2020] wherein the
auditor is required to report under clause (xi) of paragraph 3 of Companies (Auditor’ s Report)
Order,2020, about fraud by the company or any fraud on the Company.

Based on the above information, answer the following questions:
I. Misstatements in the financial statements can arise from either fraud or error. The distinguishing
factor between fraud and error is:
(a) Fraud causes a material misstatement in the financial statements.
(b) Fraud is an intentional act.
(c) Fraud is easier to detect than error.
(d) Fraud can be committed by only the management, those charged with governance, and the
employees.
II. Which of the following is not a technique of suppressing cash receipts?
(a) Writing down asset values in entirety, selling them subsequently and misappropriating the
proceeds.
(b) Adjusting unauthorized or fictitious rebates, allowances, discounts, etc. to customer’ accounts
and misappropriating amount paid by them.
(c) Manipulating totals of wage rolls either by including therein names of dummy workers or by
inflating them in any other manner.
(d) Writing off as debts in respect of such balances against which cash has already been received
but has been misappropriated.
III. To whom should XYZ & Company report the fraud committed in Honest Limited?
(a) Report the matter only to the Audit Committee constituted under section 177 since the amount
of fraud has not exceeded 1 crore.
(b) Report the matter to the Board or the Audit Committee, as the case may be, immediately but not
later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days

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