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

During planning of the audit of Alderwick plc, the auditor identifies a risk relating to management's override of controls and to revenue recognition. Which statement about how these risks are treated is correct under the ISAs?

Management override of controls is always treated as a significant fraud risk, since it exists in every entity. Revenue recognition is subject to a rebuttable presumption of fraud risk under ISA 240, so the auditor may rebut it only with a documented reason in the circumstances.

  1. AManagement override of controls is treated as a significant risk of fraud in every audit, and there is a rebuttable presumption that revenue recognition is a fraud riskCorrect
  2. BBoth are significant risks only if the client has previously been found to have committed fraud
  3. CManagement override is a rebuttable presumption, but revenue recognition fraud risk must always be assumed with no possibility of rebuttal
  4. DNeither needs to be treated as a significant risk if internal controls are documented

Explanation

ISA 240 states that management override of controls is a risk of fraud present in all entities, so it is treated as a significant risk. There is a rebuttable presumption that fraud risks exist in revenue recognition. The distractor reversing these has the rebuttal logic on the wrong risk.

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