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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Malabar Pharma Ltd, an NBFC-sponsored group entity, sold goods to a related party near the year end. Revenue of Rs 12 crore was recognised on 28 March, but the dispatch happened on 6 April, and the customer return history is nil. The audit team notes that sales are 18% of annual revenue booked in the last three days. Management's bonus depends on revenue. Consider the fraud risk and the correct audit response. Which is most appropriate?

Revenue recognition is a presumed fraud risk, strengthened here by year-end bunching and bonus pressure. The auditor should perform cut-off tests, obtain confirmation and examine dispatch records. Since dispatch occurred after year end, the Rs 12 crore should be reversed, with management representation alone being insufficient.

  1. ATreat revenue recognition as a rebuttable presumed fraud risk, here not rebutted, and perform cut-off tests, confirm with the related party, and examine dispatch documents; if the goods were dispatched after year end, propose reversal of the Rs 12 croreCorrect
  2. BTreat it as a business risk only since the customer is a related party, and rely on management representation
  3. CReverse the entire 18% of annual revenue booked in the last three days without testing
  4. DLimit the response to a disclosure under related party norms since revenue is correctly recorded when the contract is signed

Explanation

Revenue recognition is presumed a fraud risk; the cut-off indicators and bonus pressure confirm it. Procedures include cut-off testing, third-party confirmation and review of dispatch records. If control had not passed by year end (dispatch on 6 April), revenue belongs to the next year and should be reversed. Representation alone is not sufficient evidence, and wholesale reversal without testing is unsupported.

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