As per AAS-4 if auditor detects an error then –

 Options:

a) He should inform the management. b) He should communicate it to the management if it is material c) The auditor should ensure financial statements are adjusted for detected errors. d) Both (b) and (c)

The Correct Answer Is:

d) Both (b) and (c)

Correct Answer Explanation: d) Both (b) and (c)

According to AAS-4 (Auditing Standard on Contingencies and Events Occurring After the Balance Sheet Date), an auditor’s responsibility regarding detected errors in financial statements is critical. The correct answer, “d) Both (b) and (c),” is accurate due to several factors outlined in auditing standards.

Firstly, the option “b) He should communicate it to the management if it is material” aligns with the materiality concept in auditing. Materiality is a key principle where errors or misstatements that could influence the decisions of financial statement users are considered.

Auditors are obliged to communicate material errors to management as they can impact the overall accuracy and reliability of the financial statements.

Additionally, option “c) The auditor should ensure financial statements are adjusted for detected errors” emphasizes the auditor’s responsibility to ensure the accuracy and fairness of the financial statements.

Once an error is identified, especially if it is material, the auditor should ensure that appropriate adjustments are made to rectify the mistake. This ensures that the financial statements provide a true and fair view of the company’s financial position and performance.

Now, let’s discuss why the other options are not correct:

a) “He should inform the management”:

This option suggests that the auditor should inform the management about any detected error, but it lacks specificity regarding the significance of the error.

Auditors have a responsibility to exercise professional judgment and focus their attention on material misstatements or errors that could potentially impact the decision-making process of users relying on the financial statements.

Not all errors, especially those that are immaterial, require immediate attention or notification to management as they might not significantly affect the financial statement users’ understanding of the company’s financial position.

b) “He should communicate it to the management if it is material”:

This option correctly incorporates the concept of materiality, acknowledging that only material errors should be communicated to the management. Materiality is a fundamental principle in auditing, determining the significance of errors or misstatements in financial statements.

However, the option solely emphasizes communication without addressing the subsequent steps needed to rectify the error. While communication is crucial for transparency and managerial awareness, it’s equally important to ensure appropriate corrective actions are taken to rectify material errors.

c) “The auditor should ensure financial statements are adjusted for detected errors”:

This option emphasizes the correction of errors in financial statements without considering the principle of materiality. Not all detected errors, especially those that are immaterial, necessarily require adjustments in the financial statements.

Auditors are guided by the concept of materiality to distinguish between errors that are significant enough to warrant adjustments in the financial statements and those that can be deemed immaterial and not necessitate changes.

Focusing solely on ensuring adjustments might lead to unnecessary modifications in the financial statements for immaterial errors, deviating from the principle of presenting a true and fair view of the company’s financial position and performance.

In essence, while each option touches upon certain aspects of an auditor’s responsibilities, “d) Both (b) and (c)” encompasses the crucial elements of materiality and corrective actions.

It aligns with auditing standards by highlighting the communication of material errors to management and ensuring appropriate adjustments are made in the financial statements for detected errors that are considered material, ensuring the financial statements’ accuracy and reliability

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