MCQ 2- PQR Ltd.

MCQ 2-

PQR Ltd. appoints CA A as its statutory auditor. At the commencement of the engagement, management acknowledges responsibility for preparation of the financial statements and internal control. The applicable financial reporting framework is acceptable.

Three months into the audit, management discovers that the audit team has identified a potentially significant fraud involving senior management. Management now proposes that:

“Instead of continuing with the statutory audit, the engagement may be converted into a limited review engagement. The review will still provide useful assurance to the users and will avoid unnecessary disruption caused by a detailed fraud investigation.”

Management further states that the fraud has not yet been established and therefore the auditor should not treat it as a reason to refuse the change.

Assume that no law or regulation independently prohibits withdrawal from the original engagement.

Which of the following is MOST APPROPRIATE?

A. The auditor may agree to the change because SA 210 permits a change in the terms of engagement whenever management has a genuine business reason, and the existence of suspected fraud does not by itself invalidate such a reason.

B. The auditor should refuse the change because SA 240 requires the auditor to investigate every suspected fraud to its final conclusion before the auditor can consider any change in engagement terms.

C. The auditor should evaluate whether there is a reasonable justification for the change; where the requested change is not reasonably justified, the auditor should not agree to it, and management’s desire to reduce the scope in response to identified fraud risk would not, by itself, establish a reasonable justification.

D. The auditor should agree to the change if management provides written confirmation that the users will be informed that the original audit was converted into a review because SA 210 primarily protects the users through disclosure.