When auditing financial statements, auditors rely on records and representations provided by management as the primary basis for their opinion. Therefore, when management integrity is in doubt, evidence about the financial statements will also be in doubt.

If an auditor suspects a potential client may be intentionally misapplying accounting principles (a form of fraudulent financial reporting), the auditor may not have confidence in the potential client's integrity. Auditors should decline or withdraw from engagements under such circumstances.

(Choices A and B) A failure to modify internal controls for changes in IT and a lack of monitoring of segregation of duties likely indicates that control risk is high. However, the auditor can compensate for high control risk by performing additional substantive testing to support the audit opinion.

(Choice C) When management is dominated by a single individual who is also the majority shareholder, that person will have the opportunity and motivation to commit fraud, indicating an increased fraud risk. However, the auditor does not need to decline this engagement because there is no information that casts doubt on management's (ie, the stockholders') integrity.

Things to remember:
When auditors believe there is a substantial risk that management may be intentionally misapplying accounting principles (or otherwise doubt management integrity), they should decline or withdraw from the engagement.