Mcq 4 During the audit of Nova Ltd.

Mcq 4

During the audit of Nova Ltd., the auditor identifies the following:

Revenue is recognised on dispatch.
Certain large year-end sales contracts contain unusually generous return rights.
The CFO has a year-end bonus linked to reported revenue.
The CFO personally instructed the finance team to post a large number of manual journal entries on 31 March.
The entity’s internal controls over sales are otherwise operating effectively.
The auditor believes that the risk relating to revenue recognition can be rebutted because the sales controls are effective and the contracts are approved by authorised personnel.

Which of the following combinations represents the MOST APPROPRIATE application of SA 240?

A. The auditor may rebut the presumed fraud risk in revenue recognition solely because the sales controls are operating effectively; the CFO’s incentive and manual journal entries are matters relevant only to the general control environment.

B. The auditor should separately consider the presumed fraud risk relating to revenue recognition and the presumed risk of management override of controls; effective controls over sales do not, by themselves, eliminate either consideration.

C. Since the CFO personally authorised the year-end journal entries, the entries are management-approved transactions and therefore cannot constitute management override of controls.

D. Once the auditor identifies the revenue recognition risk, the presumed management-override risk becomes subsumed into the revenue risk and need not be separately evaluated.