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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error

Karim & Co audits Zenith Ltd, where the chief executive also acts as chair, controls all board decisions, and the finance team has no independent review of manual journal entries. Which statement best describes how the auditor should treat these conditions under ISA 240?

These are opportunity fraud risk factors, and ISA 240 requires management override of controls to be treated as a presumed fraud risk in every audit. The auditor must test journal entries, review estimates for bias and examine significant unusual transactions, whatever else is assessed. Risk factors alone do not prove fraud has occurred.

  1. AThey are opportunity fraud risk factors, and management override of controls must be addressed as a presumed risk regardless of the assessmentCorrect
  2. BThey are rationalisation factors, so the auditor should only make enquiries of the chair
  3. CThey indicate that fraud has occurred, so the auditor must withdraw from the engagement
  4. DThey are only relevant to error risk, so ISA 240 procedures are not required

Explanation

Dominant management and no review of journals create opportunity. ISA 240 requires the auditor to treat management override as a risk of material misstatement due to fraud in every audit, with procedures such as testing journals, reviewing estimates and significant unusual transactions. Fraud risk factors do not prove fraud occurred, so withdrawal is not automatic.

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