Mcq 3 During the audit of Omega Ltd.

Mcq 3

During the audit of Omega Ltd., the engagement team obtains the following evidence:

Management has historically provided reliable information.
The entity’s internal audit function has assessed management’s anti-fraud controls as effective.
The audit committee has stated that it has “complete confidence” in the CFO.
No employee has made a fraud allegation.
External confirmations of major receivables agree with the books.
The auditor nevertheless identifies a significant incentive for management to meet a debt covenant by year-end.

The engagement partner concludes:

“Since the cumulative evidence indicates that management is trustworthy and the controls are effective, continuing to challenge management’s representations would be inconsistent with an efficient risk-based audit. Professional skepticism requires the auditor to be alert to contradictory evidence, but it does not require the auditor to presume that management’s representations are unreliable in the absence of a specific fraud allegation.”

Which of the following is MOST ACCURATE?

A. The conclusion is substantially correct because professional skepticism does not require the auditor to assume that management is dishonest; once sufficient appropriate evidence corroborates management’s representations, further challenge is unnecessary unless a specific fraud indicator arises.

B. The conclusion is incorrect because professional skepticism requires a questioning mind and critical assessment of audit evidence, and the existence of management incentives creates a circumstance requiring continued alertness even where management has historically been reliable; however, professional skepticism does not mean that the auditor must presume management’s dishonesty.

C. The conclusion is incorrect because SA 240 requires the auditor to presume that all management representations contain fraud unless independently verified by external evidence.

D. The conclusion is correct with respect to management’s representations but incorrect only because the debt covenant creates a presumed fraud risk in every financial statement assertion affected by borrowings.