Which statement is true regarding fraud risk assessment?

• A. Auditors are responsible for detecting all fraudulent financial reporting
• B. Auditors must specifically consider fraud risk from overstating liabilities
• C. Auditor must specifically consider fraud risk from management override of controls
• D. All of them are true

Answer: (C)

Evaluating fraud risk starts with recognizing that those who run the company can sometimes override internal controls to misstate financial results. This makes management override of controls a central focus in any fraud risk assessment, so auditors are required to specifically consider this risk and tailor procedures to address it. They look for signs like unusual or forbidden journal entries, large or frequent manual adjustments, and judgments around estimates that could be exploited to achieve a desired outcome. This emphasis on management override is why that statement stands out as the true one.

Auditors do not promise to detect every fraudulent activity; audits provide reasonable assurance, not absolute certainty, and some fraud may remain hidden despite procedures. Also, while overstating liabilities could be a fraud scenario, the risk assessment isn’t limited to that area alone; it covers fraud risks across the financial statements based on the entity’s controls, incentives, and opportunities.