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Planning and Risk AssessmentFraudISA 240Auditor Responsibilities

ACCA · Question 13 · Planning and Risk Assessment

SECTION A - CASE 3: GLOBAL WATER INITIATIVE

SCENARIO:
Global Water Initiative (GWI) is an international NGO providing clean water solutions in developing nations. You are advising the board on corporate governance and internal audit. GWI currently does not have an internal audit department. The board consists of the CEO, the CFO, and two non-executive directors (NEDs), one of whom is the CEO's brother. GWI receives significant grant funding, which requires strict compliance with donor conditions. Recently, a whistleblower alleged that procurement contracts in a regional office were awarded to a company owned by the regional director.

QUESTION:
What is the external auditor's primary responsibility regarding the whistleblower's allegation of fraud in the regional office?

Answer options:

A.

To conduct a full forensic investigation to determine the exact amount stolen and prosecute the regional director.

B.

To assess how the alleged fraud impacts the risk of material misstatement in the financial statements and adjust audit procedures accordingly.

C.

To immediately report the allegation to the grant donors.

D.

To resign from the audit engagement immediately due to a breakdown in management integrity.

How to approach this question

Recall ISA 240 regarding the auditor's responsibilities relating to fraud. The focus is always on the impact on the financial statements.

Full Answer

B.To assess how the alleged fraud impacts the risk of material misstatement in the financial statements and adjust audit procedures accordingly.✓ Correct
According to ISA 240, the primary responsibility of the external auditor is to obtain reasonable assurance that the financial statements are free from material misstatement. When fraud is suspected, the auditor must evaluate the implications for the audit, particularly the risk assessment, and design appropriate substantive procedures to determine if the financial statements are materially misstated.

Common mistakes

Believing the external auditor's job is to detect all fraud or conduct forensic investigations (Option A).
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