During the audit of Apex Plastics Ltd. for the year ended 31 March 2026, the audit team noticed unusual variations in the purchases recorded during…

As per SA 240, "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements", the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment to creating a culture of honesty and ethical behaviour which can be reinforced by an active oversight by those charged with governance. When obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud. In the present case, the creation of fictitious purchases, diversion of payments amounting to approximately ₹ 1.20 crore and forgery of the purchase manager's signature indicate fraud as well as significant deficiencies in controls over purchase recording, authorisation and payment. The auditor should, accordingly, take the following steps: The auditor should communicate the identified fraud on a timely basis to the appropriate level of management and, where appropriate, to those charged with governance. The auditor should evaluate the implications of the identified fraud for the assessment of risks of material misstatement due to fraud and determine whether the audit procedures performed are adequate. Where necessary, the auditor should modify or extend the audit procedures. Since the fraud remained undetected over a period of two years and involved falsification of supporting documents, the auditor should consider the reliability of management representations and whether the circumstances raise concerns regarding the integrity of management or those charged with governance. The auditor should determine whether the fictitious purchases and related misappropriation have resulted in material misstatements in the financial statements and whether appropriate adjustments have been made. If a material misstatement remains uncorrected, the auditor should consider the consequent effect on the auditor's opinion in accordance with SA 705. The auditor should consider whether the fraud attracts any statutory or regulatory reporting requirements, including the applicable requirements under the Companies Act, 2013, and comply with such requirements. Accordingly, the management's contention that the prevention and detection of fraud is solely the auditor's responsibility is not correct. The primary responsibility rests with management and those charged with governance. The auditor should nevertheless appropriately respond to the identified fraud, reassess the risk of material misstatement, perform additional procedures where necessary, communicate the matter, consider the reporting implications and comply with applicable statutory requirements. The management's indication that it may not renew the auditor's appointment should not affect the auditor's professional judgement or discharge of the responsibilities under SA 240.