Skip to content

CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

An auditor is assessing risks of material misstatement for Sagar Pharma Ltd. Management has set aggressive sales targets linked to bonuses, and the sales head can override the revenue cut-off checks. Under SA 240 and SA 315, what is the most appropriate auditor response regarding revenue?

The auditor should treat revenue recognition as a presumed fraud risk and a significant risk, and design specific procedures such as detailed cut-off testing. Incentive pressure and management override opportunity strengthen the presumption, and management representations or high-level analytics alone cannot provide sufficient appropriate evidence.

  1. APresume a risk of fraud in revenue recognition and treat it as a significant risk, designing specific procedures such as cut-off testingCorrect
  2. BRebut the fraud risk presumption because bonuses are a normal incentive
  3. CRely entirely on management representation about cut-off
  4. DLimit procedures to analytical review of total sales

Explanation

SA 240 requires the auditor to presume fraud risks in revenue recognition unless rebutted with reasons, and here incentive and override factors support treating it as a significant risk. Specific responses like cut-off testing are needed. Representations or only analytics are not sufficient audit evidence for a significant risk.

Did you get it right without looking?

One question tells you little. A timed set on Risk Assessment and Internal Control shows your real accuracy, how long you take and where you lose marks.

Practise Risk Assessment and Internal ControlFree diagnostic mock

More Risk Assessment and Internal Control questions