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CA Final · Advanced Auditing, Assurance and Professional Ethics · Digital Auditing & Assurance

While auditing Kaveri Retail Ltd., the audit team uses a data analytics tool to test 100% of journal entries. The tool flags entries posted on Sundays, entries by a senior finance manager just before year-end, and round-sum entries to revenue. Under SA 240, what is the most appropriate conclusion about these flagged entries?

The flagged entries signal possible management override, so the auditor should investigate them, ask for explanations and obtain corroborating evidence. Analytics flags are indicators rather than proof of fraud, and testing the whole population does not remove the duty to evaluate exceptions or rely only on management's explanation.

  1. AThey are proof of fraud and should be reported to the Central Government immediately
  2. BThey indicate possible management override risk and the auditor should investigate the flagged entries, obtaining explanations and corroborating evidenceCorrect
  3. CThey can be ignored since the tool tested the whole population
  4. DThey should be dropped from testing if the CFO says they are routine

Explanation

SA 240 requires testing journal entries for management override of controls. Analytics flags are indicators, not conclusions; the auditor must inquire and corroborate with supporting evidence. Treating flags as proof of fraud is premature, and ignoring them or accepting only management's word fails to obtain sufficient appropriate evidence.

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