Yes. CAS 240 is the Canadian Audit Standard that deals with the risk of management override of control. This standard needs to be met in all financial audits regardless if the auditor’s risk assessment gives concern for such an override or not. This risk is unpredictable and requires special audit considerations.
The main approach suggested in CAS 240 to address this risk is to test journal entries for material misstatements due to fraud or error. CPA Canada acknowledges that practitioners struggle with this goal. The wide-spread use of sampling techniques to select journal entries for testing gets increasingly criticized.
CAS 240 Compliance — Five step approach to guide auditors
To assist practitioners we propose a five step approach to guide auditors through the process of identifying and testing journal entries:
- Understand the information system and business processes relevant to financial reporting.
- Make inquiries of people about inappropriate or unusual activity on the processing of journal entries and other adjustments.
- Select the journal entries and other adjustments with characteristics of potentially inappropriate journal entries and other adjustments.
- Test the appropriateness of journal entries and other adjustments.
- Document.
We describe each of these steps in detailed documentation and show how our approach meets and exceeds the CAS 240 requirements. It is a must for auditors. It makes sense that management uses the high standard that their auditors will use in their internal review processes.
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