Page 29 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
evaluation helps identify any indications of fraudulent financial reporting resulting from management's attempt
to manipulate earnings.

(CNO-S240.380) Audit procedures responsive to assessed risks of material misstatement due to fraud at the
assertion level
Audit Procedure for Fraud at assertion Level: The auditor should design and perform audit procedures that
are responsive to the assessed risks of material misstatement due to fraud at the assertion level. The nature, timing,
and extent of audit procedures may be altered to obtain more reliable and relevant audit evidence or additional
corroborative information.
Example: For instance, if management feels pressure to meet earnings expectations, there's a risk they could
inflate sales via sales agreements that prevent revenue recognition or pre-delivery invoicing. The auditor might
then design external confirmations to validate not just outstanding amounts, but also the specifics of sales
agreements such as date, return rights and delivery terms. Additionally, the auditor may find it useful to ask non-
financial personnel about any changes in these sales agreements and delivery terms.

(CNO-SA240.400) Audit procedures responsive to risks related to management override of controls
1. Risk of management override of controls: Management has the unique ability to manipulate accounting
records and prepare fraudulent financial statements by overriding controls, presenting a significant risk of
material misstatement due to fraud. This risk is present in all entities.
(Shortcut: JAO)
2. Audit Obligation: Regardless of the perceived risks of management override, auditors are required to design
and perform specific audit procedures.
2A. Journal Entries: Auditors must test the appropriateness of journal entries and other adjustments made in
the preparation of the financial statements.
2B. Review Accounting estimates for biases: Auditors need to review accounting estimates for biases and
evaluate if these biases represent a risk of material misstatement due to fraud.
2C. Outside Normal course of business: For transactions that are outside the normal course of business or
appear unusual, auditors must evaluate whether they may have been made to engage in fraudulent financial
reporting or to conceal asset misappropriation.
The auditor should also consider if additional audit procedures are necessary to respond to the identified risks of
management override of controls.

(CNO-SA240.420) Evaluation of Audit Evidence
1. RMM due to fraud: The auditor evaluates if the analytical procedures indicate any unrecognized risk of
material misstatement due to fraud.
2. Misstatement Identified: If a misstatement is identified, the auditor assesses whether it's indicative of fraud.
3. Fraud indication: In case of fraud indication, the auditor evaluates the implications of the misstatement,
especially the reliability of management representations.
3A. Management fraud: If the auditor believes a misstatement may be the result of fraud involving management,
they re-evaluate the risks of material misstatement due to fraud and its impact on audit procedures.
3B. Collusion: The auditor considers the possibility of collusion involving employees, management, or third
parties when re-evaluating the reliability of previously obtained evidence.
4. Confirmation of fraud: If the auditor confirms or cannot conclude whether the financial statements are
materially misstated due to fraud, they evaluate the implications for the audit.

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