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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

During planning for Kestrel Plc, an audit manager performs analytical procedures as a risk assessment procedure. Revenue rose 25% while trade receivables rose 60% and the average receivable collection period lengthened from 45 to 70 days. Under ISA 315 (Revised 2019) and ISA 520, which conclusion is most appropriate?

The unusual rise in receivables relative to revenue and the longer collection period may indicate a risk of material misstatement, such as overstated revenue or impaired receivables. The auditor should factor this into risk assessment and further procedures, not treat it as proof of error.

  1. AThe results indicate a possible risk of material misstatement in revenue and receivables, so the auditor should consider this in assessing risks and designing further proceduresCorrect
  2. BAnalytical procedures at planning can never identify risks, so the results should be disregarded until the final review
  3. CThe unusual relationship proves that revenue is overstated, so a modified opinion should be planned
  4. DBecause analytical procedures are not mandatory at planning, no response is needed to the fluctuation

Explanation

ISA 315 requires analytical procedures as a risk assessment procedure, and unusual relationships may indicate risks such as revenue overstatement or receivables recoverability. They do not prove misstatement, so a modification cannot be concluded at planning. The auditor uses them to design responses.

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