Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p8
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 8/41)
Character Range: 32146–35361

timing and extent are responsive to the assessed risks of material misstatement due to fraud at the assertion level.[11]  (Ref: Para. A38‑A41)

Audit Procedures Responsive to Risks Related to Management Override of Controls

32.               Management is in a unique position to perpetrate fraud because of management's ability to manipulate accounting records and prepare a fraudulent financial report by overriding controls that otherwise appear to be operating effectively.  Although the level of risk of management override of controls will vary from entity to entity, the risk is nevertheless present in all entities.  Due to the unpredictable way in which such override could occur, it is a risk of material misstatement due to fraud and thus a significant risk.

33.               Irrespective of the auditor's assessment of the risks of management override of controls, the auditor shall design and perform audit procedures to:

         (a)                Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial report.  In designing and performing audit procedures for such tests, the auditor shall:

             (i)                 Make enquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments;

             (ii)               Select journal entries and other adjustments made at the end of a reporting period; and

             (iii)             Consider the need to test journal entries and other adjustments throughout the period.  (Ref: Para. A42‑A45)

         (b)                Review accounting estimates for biases and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement due to fraud.  In performing this review, the auditor shall:

             (i)                 Evaluate whether the judgements and decisions made by management in making the accounting estimates included in the financial report, even if they are individually reasonable, indicate a possible bias on the part of the entity's management that may represent a risk of material misstatement due to fraud.  If so, the auditor shall re‑evaluate the accounting estimates taken as a whole; and

             (ii)               Perform a retrospective review of management judgements and assumptions related to significant accounting estimates reflected in the financial report of the prior year.  (Ref: Para. A46‑A48)

         (c)                For significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual given the auditor's understanding of the entity and its environment and other information obtained during the audit, evaluate whether the business rationale (or the lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.  (Ref: Para. A49)

34.               The auditor shall determine whether, in order to respond to the identified risks of management override of controls, the auditor