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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Kaveri Agro Foods Ltd's auditor identifies that the CFO, who also controls the accounting software access, has overridden controls to post manual journal entries near the year-end raising revenue by Rs 3 crore. Materiality is Rs 1 crore. Under SA 240, how should the auditor treat the risk of management override of controls?

Management override of controls is a presumed significant risk of fraud in every audit under SA 240 and cannot be rebutted. The auditor must test journal entries, review estimates for bias and assess the rationale of unusual transactions, whatever the entity's governance structure or listing status.

  1. AAs a significant risk that is presumed to exist in every audit and cannot be rebuttedCorrect
  2. BAs a risk that can be rebutted if the company has an effective audit committee
  3. CAs a risk relevant only when the entity is listed and the fraud is proven
  4. DAs a low risk because the entries are below total revenue

Explanation

SA 240 treats the risk of management override of controls as present in all entities and as a significant risk; it cannot be rebutted. The auditor tests journal entries, reviews estimates for bias and evaluates the business rationale of unusual transactions. An audit committee does not remove the presumption.

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