CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

CA Anita is statutory auditor of Deccan Pharma Ltd. for the year ended 31 March. Mid-audit she finds the company's financial statements follow the applicable framework, but she suspects the CFO has overridden controls to inflate revenue by a material amount, a risk that is present in every entity. She concludes that her standard audit procedures would not be affected as she is not required to do anything special about management override. Which statement best describes the correct audit response under the Standards on Auditing?

The auditor must treat management override of controls as a presumed fraud risk in every audit. SA 240 requires procedures such as testing journal entries, reviewing accounting estimates for bias and evaluating the business rationale for significant unusual transactions. It is not outside the auditor's scope, nor does it call for automatic resignation.

1. ACorrect, as management override is outside the auditor's scope because fraud detection is the sole duty of the Board
2. BIncorrect, as the auditor must treat management override as a presumed fraud risk in every audit and design procedures such as testing journal entries, reviewing estimates for bias and evaluating the rationale for significant unusual transactionsCorrect
3. CIncorrect, as the auditor must immediately resign under the Companies Act without any further procedures
4. DCorrect, because management override is addressed only if an internal auditor reports it