During the audit of a nonissuer, the auditor identifies a risk of management override of controls. According to AU-C 240, which of the following procedures is REQUIRED to address this specific fraud risk?

Answer options:

Conduct interviews with the audit committee regarding their oversight of the fraud risk assessment process.

Review accounting estimates for biases and evaluate whether the circumstances represent a risk of material misstatement due to fraud.

Increase the sample size for all substantive tests of details.

Perform a surprise inventory count at a location not previously announced.

How to approach this question

Memorize the 3 mandatory procedures for Management Override: JEs, Estimates, Unusual Transactions.

Full Answer

B.Review accounting estimates for biases and evaluate whether the circumstances represent a risk of material misstatement due to fraud.✓ Correct

AU-C 240 requires the auditor to review accounting estimates for biases that could result in material misstatement due to fraud, including a retrospective review of significant management estimates reflected in the financial statements of the prior year.

Common mistakes

Selecting general fraud responses instead of the specific mandatory ones.

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