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

Orchid Components has one dominant managing director who also acts as chair, approves all journal entries personally, and has no independent oversight. The audit team is assessing fraud risk factors. Which statement is most consistent with ISA 240?

Management override is presumed present in every audit and cannot be rebutted. Dominance without oversight increases opportunity, so the auditor must still test journal entries, review estimates for bias and evaluate unusual significant transactions, in addition to considering any wider response the heightened risk requires.

  1. AManagement override of controls is a risk present in every entity, and this domination increases the opportunity, so the team must still perform the required procedures on journals, estimates and unusual transactions.Correct
  2. BBecause the managing director is dominant, the risk of override can be rebutted as not relevant for this audit.
  3. CThe domination affects only rationalisation, so no audit response is needed beyond enquiry.
  4. DThe risk is a control deficiency to be reported only to management, with no change to audit procedures.

Explanation

ISA 240 treats management override as a significant risk in all audits that cannot be rebutted. Dominance and lack of oversight raise opportunity, but the mandatory procedures (testing journals, reviewing estimates for bias, evaluating significant unusual transactions) apply regardless. The rebuttal option is wrong as override cannot be rebutted.

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