An auditor is auditing the financial statements of a nonissuer. The auditor identifies a fraud involving the theft of inventory by a warehouse employee. The amount is immaterial to the financial statements. To whom should the auditor report this fraud?

Answer options:

The audit committee.

The SEC.

Management at least one level above the person involved.

The internal audit function only.

How to approach this question

Fraud Reporting: Material? -> Governance. Senior Mgmt involved? -> Governance. Immaterial & Low Level? -> Management (One level up).

Full Answer

C.Management at least one level above the person involved.✓ Correct

AU-C 240 requires the auditor to report evidence of fraud to the appropriate level of management (at least one level above the persons involved). If the fraud involves senior management or is material, it must be reported to those charged with governance.

Common mistakes

Thinking all fraud goes to the Audit Committee. Only material fraud or senior management fraud MUST go there.

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