The board of directors of Sigma Ltd. receives information suggesting that its purchase manager has been diverting inventory by creating fictitious purchase returns.

The statutory auditor is already conducting the annual audit.

The board asks the statutory auditor to “investigate the matter and identify every transaction through which the manager may have benefited personally.”

The auditor’s team proposes the following:

Extend testing specifically to transactions connected with the suspected employee.
Examine e-mails, inventory records, purchase-return documents and relevant electronic evidence.
Determine whether apparently unrelated transactions form part of the same suspected scheme.
Quantify the financial loss attributable to the suspected fraud.
Restrict the work to the materiality threshold used for the statutory audit because transactions below materiality need not be investigated.

The engagement partner makes the following observation:

“Items 1 to 4 may be appropriate for an investigation, but Item 5 cannot automatically be imported into an investigation merely because the investigator is also the statutory auditor.”

Which ONE of the following is correct?

A. The partner is correct because an investigation is directed towards establishing facts relating to a specific matter and its scope is determined by the objectives of the investigation rather than automatically by statutory-audit materiality.

B. The partner is incorrect because the statutory auditor must apply the same materiality threshold in an investigation to maintain consistency between the two assignments.

C. The partner is correct only if the suspected fraud has already been admitted by management; otherwise the investigation must follow the statutory-audit materiality threshold.

D. The partner is incorrect because once the statutory auditor accepts an investigation, the investigation automatically becomes an extension of the statutory audit.