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    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?
    A Accept management explanation if occasional and small. Correct Answer Incorrect Answer
    B Expand procedures: test entries’ authorization, supporting documentation, interview preparers, and assess for fraud risk; consider reporting to those charged with governance. Correct Answer Incorrect Answer
    C Ignore—these are adjusting entries by preparer. Correct Answer Incorrect Answer
    D Issue an adverse opinion immediately. Correct Answer Incorrect Answer
    E Increase materiality threshold to avoid flagging small manipulations. Correct Answer Incorrect Answer

    Solution

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

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