CFE – Fraud Prevention and Deterrence — Question 79

During an external audit, the audit team identifies evidence that management has intentionally omitted some expenses from the company’s financial statements in order to conceal an asset misappropriation scheme. However, the amount of the resulting misstatement does not meet the quantitative materiality threshold for the audit. Which of the following is TRUE regarding this situation?

Answer options

• A. The auditors should assume that all audit evidence collected previously is unreliable and withdraw from the audit engagement
• B. The auditors can ignore the misstatement because the omitted amount is less than the quantitative materiality threshold and therefore immaterial to the audit
• C. The auditors do not need to be concerned with this evidence, as asset misappropriation schemes are not considered relevant or material for external audit purposes
• D. The auditors should assess the need to adjust the nature, timing, and extent of remaining audit procedures based on this evidence

Correct answer: D

Explanation

The correct answer is D because, despite the misstatement being below the materiality threshold, the discovery of intentional omission indicates a potential risk that could affect the audit's reliability. Options A, B, and C are incorrect as they either suggest disregarding the evidence or misinterpret the relevance of asset misappropriation in the context of auditing standards.