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

Brandt Co's auditor suspects that the management team has misstated revenue through fictitious sales. Management denies this and offers a plausible explanation, but the auditor can no longer rely on its representations. Which action is most consistent with ISA 240 and ISA 580?

The auditor should reassess how reliable management's representations are and consider the effect on the audit, including the written representations. Where management is suspected of fraud, its explanations cannot be accepted at face value, and professional scepticism requires corroborating evidence.

  1. AAccept the explanation, since management has the better knowledge of the business
  2. BReconsider the reliability of management representations and assess the effect on the audit and the written representations obtainedCorrect
  3. CCease all substantive testing, since fraud has been confirmed
  4. DDiscuss the matter only with the audit junior to avoid tipping off management

Explanation

When fraud or suspected fraud involves management, the auditor must reconsider the reliability of management's representations and evaluate the implications for the audit. This affects the written representations and the risk assessment. Accepting the explanation without evidence ignores professional scepticism, and stopping the testing is not required.

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