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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

During the audit of Himalaya Foods Ltd, the auditor finds that the CFO, who also heads internal audit, overrides approval controls for journal entries at quarter-end when targets are close to being missed. Which statement reflects the correct audit response?

The auditor should treat management override of controls as a presumed fraud risk in every audit and respond by testing journal entries, reviewing estimates for bias and evaluating unusual transactions. Merely noting it as a routine deviation or relying on a compromised internal audit function would be inadequate under SA 240.

  1. ATreat it as a routine control deviation and increase the sample size of purchase testing only
  2. BTreat management override as a risk present in every entity, and design procedures including testing journal entries and reviewing estimates for biasCorrect
  3. CReport it only in the management letter, since management override cannot affect the financial statements
  4. DRely on the internal audit function's work since the head is a senior officer

Explanation

Under SA 240, management override of controls is a presumed significant fraud risk in every audit. Responses include testing the appropriateness of journal entries, reviewing accounting estimates for bias and evaluating the business rationale of unusual transactions. Relying on internal audit headed by the overriding officer is inappropriate as its objectivity is compromised.

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