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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error

Auditing Marlow Engineering, the auditor identifies a risk of material misstatement due to fraud in inventory valuation. Which response best reflects ISA 240 requirements for responding to assessed fraud risks at the assertion level?

The auditor should alter the nature, timing and extent of procedures to respond to the assessed fraud risk, for example by attending inventory counts unannounced or at extra locations. Relying on prior-year work, management representations or junior staff does not adequately address a heightened fraud risk.

  1. ARely on the prior year's audit procedures since the inventory process is unchanged
  2. BChange the nature, timing and extent of procedures, for example by attending an unannounced inventory count at additional locationsCorrect
  3. CReduce sample sizes because management has represented in writing that no fraud exists
  4. DPerform the same procedures but assign them to the most junior team members to reduce cost

Explanation

ISA 240 requires responses to assessed fraud risks that alter the nature, timing and extent of procedures, such as unannounced attendance or more extensive testing. Repeating prior-year work, reducing samples on the basis of representations, or assigning junior staff all fail to respond to the heightened risk. Management representations cannot substitute for audit evidence.

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