## **Learning Outcomes**

After reading this article, you will be able to explain the auditor’s duty to maintain professional scepticism throughout the audit, especially regarding the risk of management override of controls. You will be able to recognise common indicators that management may be manipulating the financial statements, describe examples of management override, and outline audit procedures and responses to mitigate these risks.

## **ACCA Audit and Assurance (AA) Syllabus**

For ACCA Audit and Assurance (AA), you are required to understand the importance of professional scepticism and professional judgement in detecting and responding to management override. Revision for this topic should focus on:

- The meaning of professional scepticism and judgement, and how they are applied in auditing.
- The auditor’s obligation to be alert to the possibility of management override of controls.
- Typical indicators that management override of controls or manipulation might have occurred.
- Specific fraud risk factors and red flags for management behaviour.
- Procedures to assess and respond to the risk of management override, including those relating to journal entries, accounting estimates, and unusual transactions.
- The impact of management override on risk assessment and the need for further audit procedures.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Define professional scepticism. Why is it particularly important in relation to management override?
2. List three indicators that may suggest management override of controls is occurring.
3. Which of the following is a possible sign of management override?  
   a) Significant accounting estimates always biased towards profit  
   b) All reconciliations carried out on time and without exception  
   c) Regular staff rotation in high-risk roles  
   d) External auditor involvement in daily transactions
4. Name two audit procedures aimed specifically at detecting management override of controls.

## **Introduction**

Professional scepticism requires auditors to maintain a questioning mind and to critically evaluate audit evidence—especially where there is a risk of fraud through management override. Management override describes situations where senior personnel bypass or manipulate established rules, controls, or estimates to achieve a desired financial result. Such actions subvert even robust internal controls and present a significant risk of material misstatement, often as a result of fraud.

> **Key Term: professional scepticism**
> An auditor’s attitude of critical assessment, continual questioning, and alertness to possible misstatement due to fraud or error, especially when evidence contradicts management representations.
>
> **Key Term: management override of controls**
> Actions by management to bypass, disable, or manipulate internal controls or accounting systems to misstate financial information or conceal fraud.

### The role of professional judgement

Auditors must use professional judgement to weigh the significance of evidence, assess risk factors, and determine the extent and timing of audit procedures required when management override is suspected or a possibility.

> **Key Term: professional judgement**
> The application of relevant knowledge and experience, considering audit evidence and facts, to make informed audit decisions, including how and when to respond to risks.

### Why management override is a significant risk

Internal controls are designed to prevent or detect most fraud and error. However, management (especially at a high level) has the ability to circumvent controls and approve improper entries or transactions. Auditors should never assume that controls, by themselves, are enough to prevent material misstatement due to fraud.

#### Typical areas where override may occur

- Manual journal entries, particularly at period end.
- Significant estimates or assumptions (e.g., provisions, fair values).
- Unusual or complex transactions outside normal business.
- Related party transactions not at arm's length.

### Indicators of management override

Being alert to the following signs is key to a sceptical approach:

- Frequent, unexplained changes in accounting policies or estimates.
- Journal entries posted at unusual times (e.g., weekends, late nights, periods just before reporting deadlines).
- Large end-of-period adjustments that boost profit or hide losses.
- Transactions lacking legitimate business rationale.
- Unusually high turnover of finance staff or resistance to auditor inquiries.
- Management insisting on minimal auditor access to information, or delays in providing supporting documents.
- Overrides of approval limits, weak segregation of duties, or lack of supporting paperwork for material transactions.

### **Worked Example 1.1**

A finance director makes several significant, manual journal entries late on the day accounts are closed. All post significant expenses to a “prepayments” account, thus boosting reported profit for the year. There is limited supporting documentation.

**Question:** What risk does this scenario present, and how should the auditor respond?

> **Answer:**  
> The late, unsupported journal entries may be an indicator of management override to misstate profit. The auditor should perform specific testing of manual entries near period end, seek explanations and evidence, and challenge management if justification is lacking.

### Fraud risk factors relating to management override

Auditors must consider possible motivations—such as performance bonuses, debt covenants, or achieving external analyst targets. Pressure to deliver results can lead management to justify override as “temporary” or “not material.”

Common fraud risk factors include:

- Unexpected improvement in financial results compared to trends or budgets.
- Incomplete, contradictory, or vague answers from management.
- Significant or unusual transactions with related parties.
- Weak governance or a culture that rewards results at any cost.
- History of previous override or errors “corrected” after auditor challenge.

### Auditor response to management override risk

ISA 240 (The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements) requires specific responses, regardless of other risk assessment conclusions whenever management override is a risk.

Required steps include:

- Test appropriateness and documentation of journal entries, especially manual or late entries.
- Review accounting estimates for possible management bias.
- Examine significant transactions outside ordinary business for proper business rationale and appropriate approval.
- Consider contradictory evidence or explanations and be prepared to seek additional corroboration.
- Discuss with all audit team members the risk of override and agree on sceptically designed, unpredictable procedures.

### **Worked Example 1.2**

During the audit of a listed company, the engagement team notes round-figure sales recorded on the last day of the year, resulting in profit just above analyst expectations.

**Question:** What should the auditor do?

> **Answer:**  
> These sales may have been recorded to meet profit targets—potentially a sign of override. The auditor should test the sales by confirming shipment, cash receipts, and review correspondence with customers, challenging any unsupported entries with management.

### Common audit procedures for detecting override

- Obtain and evaluate a listing of all manual journal entries.
- Use data analytics to search for unusual patterns in entries (e.g., amounts just above materiality, recurring exceptions).
- Interview staff outside top management for explanations on accounting adjustments.
- Review post-period adjustments for reversals or corrections.
- Assess whether management’s attitude or behaviour during the audit raises suspicion.

### **Exam Warning**

> Do not rely on controls alone—always consider management override. Examiners often penalise answers which assume that segregation of duties makes override impossible.

### What to do if override is suspected or detected

If evidence of management override is found:

- Increase the extent of testing in the area concerned.
- Escalate your concerns to those charged with governance.
- Consider the implications for audit evidence and whether additional or alternative procedures are needed.
- Document findings thoroughly and be prepared to modify the audit opinion if sufficient evidence cannot be obtained.

## **Summary**

Professional scepticism and sound judgement are essential in responding to the risk of management override. Auditors should be alert for indicators such as unusual journal entries, changes in estimates, or transactions lacking justification. Effective response includes testing manual entries, reviewing estimates for bias, and maintaining open dialogue with the audit team and those charged with governance. Always challenge information given by management if it conflicts with other evidence.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain professional scepticism and professional judgement and their importance in the audit process.
- Identify the risk posed by management override of controls—even in strong control environments.
- List indicators that management may be overriding controls, such as unusual journal entries or changes in estimates.
- Describe the auditor’s required responses, including testing of manual journal entries and review of significant transactions.
- State actions to take if override is suspected, including documenting findings and escalating to those charged with governance.

## **Key Terms and Concepts**

- professional scepticism
- management override of controls
- professional judgement

Professional scepticism and judgement - Indicators of management override