Page 21 - CA Inter Audit PARAM

CA Ravi Taori
QNO— Subsequent Discovery of a Material Misstatement New Course – (SM25)
200.18.50 Bhaskar CNO - SA200.080
Zeeba Products is a partnership firm engaged in trading of designer dresses. The firm has
appointed JJ & Co, Chartered accountants to audit their accounts for a year. The auditors were
satisfied with control systems of firm, carried out required procedures and necessary verifications.
In particular, they carried out sample checking of purchases, traced purchase bills to GST portal
and also made confirmations from suppliers. They were satisfied with audit evidence obtained by
them as part of audit exercise. An audit report was submitted to the firm giving an opinion that
financial statements reflected true and fair view of state of affairs of the firm.

However, later on, it was discovered that purchase manager responsible for procuring dresses
from one location was also booking fake purchases of small values by colluding with unethical
dealers. Payments to these dealers were also made in connivance with accountant through
banking channel.

The partners of firm blame auditors for futile audit exercise. Are partners of firm correct in their
view point? Imagine any probable reason for such a situation.
Answer - Does not mean Failure, it can he because of Inherent Limitations: Accordingly, the subsequent
discovery of a material misstatement of the financial statements resulting from fraud or error does
not by itself indicate a failure to conduct an audit in accordance with SAs.

- Appropriateness depends on circumstances: Whether the auditor has performed an audit in
accordance with SAs is determined by the audit procedures performed in the circumstances, the
sufficiency and appropriateness of the audit evidence obtained as a result thereof and the suitability
of the auditor's report based on an evaluation of that evidence in light of the overall objectives of the
auditor.

- But Inherent Limitations cannot be misused For Poor Audit Evidence: However, the inherent
limitations of an audit are not a justification for the auditor to be satisfied with less-than-persuasive
audit evidence.

It is example of failure of internal controls of the firm. The internal control has not operated due to
collusion between employees which is a limitation of internal control itself. The auditor has relied
upon internal controls. It is very nature of financial reporting that management is responsible for
devising suitable internal controls. This is an inherent limitation of audit.

Hence considering the above limitations, the partners of Zeeba products is not correct and cannot
blame the auditors for the failure of internal control of the firm.

QNO Ethical Requirements- Fundamental Principles Old Course – (M19M/M20M/M19R/N20E/M22R)
200.19 Bhaskar CNO SA200.100
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements.
OR
Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants (IESBA
Code) related to an audit of financial statements. Discuss with reference to those fundamental principles
of professional ethics.

OR
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the
Code of Ethics for Professional Accountants (IESBA Code) related to an audit of financial statements. The
Code establishes the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements. Explain
Answer ➢ Mandatory:
The auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements.

www.auditguru.in 1.14