An auditor is auditing the financial statements of a nonissuer. The auditor identifies a risk of material misstatement due to fraud related to management override of controls. Which of the following procedures is REQUIRED to address this risk?

Answer options:

Review accounting estimates for biases and examine journal entries.

Confirm all significant account balances.

Observe the physical inventory count at year-end.

Interview the audit committee regarding fraud risks.

How to approach this question

Management Override Response (Memorize): 1. JE Testing. 2. Estimate Review (Bias). 3. Unusual Transactions.

Full Answer

A.Review accounting estimates for biases and examine journal entries.✓ Correct

To address the risk of management override of controls, AU-C 240 requires the auditor to: (1) test the appropriateness of journal entries and other adjustments; (2) review accounting estimates for biases; and (3) evaluate the business rationale for significant unusual transactions.

Common mistakes

Thinking general fraud procedures apply. Override has specific mandatory tests.

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