Question

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery?

a. Issue an adverse opinion on the financial statements
b. Report the matter to law enforcement
c. Document the finding but take no further action
d. Communicate the matter to those charged with governance

Answer 1

The correct response for an auditor upon discovering a fraudulent, inconsequential expense reimbursement is to d. communicate the matter to those charged with governance to ensure corrective action and maintain audit integrity.

Step-by-step explanation:

When an auditor discovers a fraudulent expense reimbursement transaction during an audit, even if the transaction is inconsequential and not material to the financial statements in the aggregate, the appropriate response is not to simply issue an adverse opinion or report the matter to law enforcement directly.

Instead, the auditor is required to d. communicate the matter to those charged with governance, according to professional auditing standards.

This response ensures that the governing body is aware of the issue and can take appropriate actions to address the fraud and prevent future occurrences, while also maintaining the integrity of the auditing process.