Audit and Assurance · Assessing audit risks

Fraud, Error and Going Concern Risks in ACCA Audit

Updated 11 October 2026 · Fact-checked

Fraud is intentional misstatement; error is unintentional. Under ISA 240 the auditor does not prevent or detect all fraud but must obtain reasonable assurance, stay sceptical and assess fraud risks. At planning you also look for going concern indicators (financial, operating, other) and plan extra work where they appear.

Understand Fraud, Error and Going Concern Risks

A misstatement in the financial statements arises from either fraud or error. The difference is intent. Fraud is an intentional act by management, those charged with governance, employees or third parties, involving deception to gain an unjust or illegal advantage. Error is unintentional, such as a calculation slip or a misapplied accounting policy.

The auditor is not responsible for preventing fraud. Management and those charged with governance are responsible for prevention and detection through sound internal controls and a culture of honesty. The auditor's duty under ISA 240 is to obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. Because fraud involves concealment and collusion, the risk of not detecting a material fraud is higher than for error. Management fraud is harder still, because management can override controls.

At planning, the auditor must maintain professional scepticism, hold a team discussion about how and where the financial statements might be vulnerable to fraud, and perform risk assessment procedures including enquiries of management. ISA 240 requires the auditor to presume that there is a risk of fraud in revenue recognition and to treat management override of controls as a significant risk. Both are treated as significant risks needing specific responses.

Fraud risk factors are grouped under the fraud triangle: incentive or pressure (for example bonuses tied to profit, or loan covenants), opportunity (weak controls, a dominant director, complex transactions) and attitude or rationalisation (a culture that tolerates cutting corners). Two types of fraud matter: fraudulent financial reporting (misstating the numbers) and misappropriation of assets (theft).

Going concern is a related planning risk. Management assumes the entity will continue for the foreseeable future. Under ISA 570 the auditor considers at planning whether events or conditions cast significant doubt on this. Indicators fall into financial, operating and other categories. If they exist, the auditor plans further procedures. Going concern pressure also raises fraud risk, because struggling entities have an incentive to window-dress results.

Key rules to remember

Fraud triangle: Fraud risk = Incentive/pressure + Opportunity + Rationalisation/attitude; Use it to structure fraud risk factors in a scenario. It is a framework, not a calculation.
Presumed fraud risks (ISA 240): Revenue recognition (presumed risk) + Management override of controls (always a significant risk); Treat both as significant risks. Management override applies to every audit; the revenue presumption can be rebutted only with a documented reason.
Responsibility split: Management/TCWG: prevent and detect fraud. Auditor: reasonable assurance that statements are free from material misstatement.; Never say the auditor is responsible for preventing fraud.
Fraud vs error test: Fraud = intentional act. Error = unintentional act.; Intent is the only distinguishing feature.
Going concern indicator groups: Financial + Operating + Other; Sort each indicator in the scenario into a group, then state the audit implication.

How to solve Fraud, Error and Going Concern Risks questions

Use this method for any question on fraud, error or going concern risks at the planning stage.

1Read the requirement and note the verb: identify, explain, describe or recommend. Note whether it asks about fraud risks, going concern or both.
2Scan the scenario and underline facts: bonuses, targets, covenants, weak controls, dominant individuals, falling sales, cash problems, losses.
3Classify each fact. For fraud, label it incentive, opportunity or attitude. For going concern, label it financial, operating or other.
4Explain why each fact matters in one sentence, linking it to a specific financial statement area, such as inflated revenue or overstated receivables.
5State the effect on the audit: a significant risk, extra scepticism, senior staff, unpredictable procedures or specific going concern procedures.
6Distinguish clearly between management's responsibility and the auditor's responsibility if the requirement asks for it.
7Finish with a short link to the response, such as discussing with management or planning cash flow forecast review. Keep points separate and in sentence form.

Quickest way: Fact, factor, so-what

When to use it: Use this when time is short in a Section B or Section C scenario worth only a few marks per point.

Pick a fact from the scenario.
Name the factor type: incentive, opportunity, attitude, or financial, operating, other indicator.
Add the so-what: which balance or assertion is at risk and what the auditor does.
Repeat until you have one point for each mark available.
For objective questions, check intent first for fraud versus error, then check who bears the responsibility.

Common mistakes in Fraud, Error and Going Concern Risks

Saying the auditor is responsible for preventing and detecting all fraud.
Students think the auditor is the main safeguard against fraud.
Fix: State that management and those charged with governance are responsible. The auditor obtains reasonable assurance and is not a guarantor.
Defining fraud and error by the size of the amount.
Students link fraud with large losses.
Fix: The difference is intent only. A small deliberate misstatement is fraud and a large accidental one is error.
Listing fraud risk factors without explaining their impact.
Students copy facts from the scenario and run out of time.
Fix: Add one sentence for each fact explaining what could be misstated and how that changes the audit.
Ignoring revenue recognition and management override.
Students focus only on scenario-specific details.
Fix: Mention both as ISA 240 significant risks when asked about fraud risk in general. Explain that the revenue presumption can be rebutted only with justification.
Treating going concern indicators as proof that the entity is not a going concern.
Students jump to the conclusion of a modified opinion.
Fix: Indicators only trigger further work at planning. Say the auditor will assess management's plans and consider the effect on the audit.
Mixing up fraud risk factors with going concern indicators.
Both topics use scenario facts such as falling profits.
Fix: Answer the exact requirement. A profit target creates a fraud incentive. Recurring losses and negative cash flow are going concern financial indicators.

Worked examples

Example 1

Section C style: Zephyr Co is a manufacturer. The finance director's bonus depends on reaching a profit target. Zephyr has a bank loan with a covenant requiring a minimum current ratio. The finance director also controls the accounting system and approves all journal entries without review. Identify the fraud risk factors and explain the implications for the audit.

Show the solution

Incentive or pressure: the bonus depends on profit, so the finance director may overstate profit. The covenant gives pressure to inflate current assets or understate current liabilities.
Opportunity: one person controls the system and approves all journals without review. This creates a clear opportunity for management override of controls.
Impact on risk: revenue, receivables, inventory and liabilities cut-off are likely to be overstated or understated. Manual journals are a high-risk area.
Audit response: treat management override as a significant risk. Test journal entries, particularly unusual ones near the year end. Review accounting estimates for bias.
Staffing and approach: assign senior staff, hold a team discussion on fraud, and include unpredictable procedures. Make enquiries of management and those charged with governance.

Answer: Pressure arises from the profit-linked bonus and the covenant. Opportunity arises from the finance director's unreviewed control over journals and the accounting system. The auditor should treat management override as a significant risk, test journals and estimates, use senior staff and apply scepticism.

Example 2

Section B style: During planning for Orchid Co, you note that sales have fallen for three years, the company has made losses in the last two years, the bank overdraft is at its limit, and its main supplier has recently demanded payment in advance. Orchid also lost its largest customer after a dispute. Identify the going concern indicators and explain what the auditor does at planning.

Show the solution

Financial indicators: recurring losses, an overdraft at its limit and a supplier demanding payment in advance (a sign of strained liquidity and creditor concern).
Operating indicators: falling sales and loss of the largest customer reduce future income.
Other indicators: none are given in the scenario, for example legal proceedings or loss of a licence. Do not invent them.
Implication at planning: going concern is a significant area. The auditor discusses management's assessment and plans for the future.
Planned work: request cash flow forecasts and test their assumptions, review bank facility terms and correspondence, and consider post year-end events. Allow for extra audit time and senior review.
Link to fraud: the pressures create an incentive to window-dress results, so the auditor also stays alert to fraud risk.

Answer: Financial indicators are losses, the maxed overdraft and the supplier's prepayment demand. Operating indicators are falling sales and the loss of the main customer. The auditor plans to review management's forecasts and plans, test their assumptions, and consider the bank facilities. The auditor also stays alert to fraud pressure.

Exam tips

Always link a risk factor to the financial statement area it affects. A bare list scores poorly.
Learn the two ISA 240 headline risks: revenue recognition and management override of controls. Use them when a question asks generally about fraud risk.
In objective questions, check the wording for who is responsible. Management prevents and detects fraud. The auditor obtains reasonable assurance.
For going concern, use the three groups and quote only the indicators in the scenario. Do not add invented facts.
Because objective questions are marked all or nothing, read all four options before choosing. Wrong options often give the auditor sole responsibility for fraud.

Fraud, Error and Going Concern Risks in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fraud, Error and Going Concern Risks: frequently asked questions

What is the difference between fraud and error in an audit?

The difference is intent. Fraud is an intentional act involving deception to gain an unjust advantage. Error is an unintentional mistake, such as a miscalculation or misapplied policy.

Is the auditor responsible for detecting fraud?

The auditor must obtain reasonable assurance that the financial statements are free from material misstatement, including that caused by fraud. The primary responsibility for prevention and detection rests with management and those charged with governance. The auditor cannot guarantee detection.

What are the main ISA 240 fraud risk factors?

They are usually grouped under incentive or pressure, opportunity, and attitude or rationalisation. Examples are profit-linked bonuses, weak controls and a dominant director. Use scenario facts and explain their effect on the audit.

What are examples of going concern indicators at planning?

Financial indicators include recurring losses, net current liabilities and negative cash flows. Operating indicators include loss of key customers or management. Other indicators include legal proceedings or loss of a licence.

How should I answer a fraud risk question in the exam?

Pick facts from the scenario, label each as incentive, opportunity or attitude, and explain which balance could be misstated. Then state the audit response, such as testing journals or using senior staff.