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

While testing journal entries at Orion Telecom, the auditor finds several large manual entries posted by the finance director just after the year end, with vague descriptions, that increase revenue and profit to just above a loan covenant threshold. Which action is most consistent with ISA 240?

The auditor should treat the entries as a possible indicator of fraud through management override, obtain corroborating evidence of their business rationale, reassess risks and consider communicating with those charged with governance. Management representations alone are insufficient, and immediate external reporting is not the first required step under ISA 240.

  1. AAccept the entries if the finance director confirms in writing they are valid, as management override is mitigated by representations
  2. BEvaluate whether the entries indicate fraud risk, obtain corroborating evidence for them, and consider the implications for the audit and for communication with those charged with governanceCorrect
  3. CExclude the entries from testing because ISA 240 only requires testing of automated entries
  4. DReport the matter directly to the regulator immediately without discussing it with management or those charged with governance

Explanation

Management override of controls is a presumed risk that cannot be rebutted, and ISA 240 requires testing journals and evaluating the business rationale of unusual entries. The auditor should seek corroborating evidence and consider the effect on the audit, including communication with those charged with governance. Written representations are not sufficient evidence, and reporting externally is a separate consideration governed by confidentiality and law, not an immediate first step.

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