Question

During a statutory audit, the auditor discovers a pattern of journal entries posted near year-end reversing shortly after year-end that inflate reported profit. Management explains entries as timing differences. What is the auditor’s most appropriate immediate course of action?

Q: Answer-During a statutory audit, the auditor discovers a pattern of journal entries posted near year-end re...

Unusual patterns of year-end adjustments that reverse post year-end are red flags for possible earnings managementfraud. Auditor must perform expanded substantive and fraud procedures, evaluate control weaknesses, and communicate appropriately only after procedures conclude consider opinion impact.

A Accept management explanation if occasional and small.

B Expand procedures: test entries’ authorization, supporting documentation, interview preparers, and assess for fraud risk; consider reporting to those charged with governance.

C Ignore—these are adjusting entries by preparer.

D Issue an adverse opinion immediately.

E Increase materiality threshold to avoid flagging small manipulations.

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