CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control
During the audit of Sundaram Pharma Ltd, the auditor identifies that the company recognises a large portion of its annual revenue through year-end bulk dispatches to distributors, with a bonus linked to reported sales payable to the sales head. The auditor concludes this is a significant risk. Under SA 240, what is the correct presumption and response regarding revenue recognition?
There is a rebuttable presumption of fraud risk in revenue recognition, so the auditor evaluates which revenue types create such risk and designs specific responses, such as cut-off testing. It is not conclusive, because the auditor may rebut it with documented reasons, but here the bonus incentive supports treating it as significant.
- AThere is a rebuttable presumption that fraud risks exist in revenue recognition, so the auditor should evaluate which types of revenue give rise to such risks and design specific responsesCorrect
- BRevenue fraud risk is irrelevant unless management confesses to manipulation
- CThe presumption of revenue fraud risk is conclusive and can never be rebutted in any engagement
- DThe auditor should treat revenue risk as a risk only for the internal auditor to address
Explanation
SA 240 requires the auditor to presume that there are risks of fraud in revenue recognition and evaluate which types of revenue, transactions or assertions give rise to such risks. The presumption is rebuttable, not conclusive, so the option calling it conclusive is wrong. Here the bonus incentive and year-end dispatches strengthen the risk, and specific procedures such as cut-off testing are needed.
Did you get it right without looking?
One question tells you little. A timed set on Risk Assessment and Internal Control shows your real accuracy, how long you take and where you lose marks.
More Risk Assessment and Internal Control questions
- While planning the audit of Kaveri Textiles Ltd, the engagement team identifies that the company's revenue recognition is highly complex and…
- Auditor Rohan finds that at Deccan Steels Ltd., the same accounts officer raises purchase orders, receives goods and approves supplier payme…
- During the audit of Bharat Steels Pvt Ltd, the auditor learns that the internal auditor reports directly to the finance manager, who is also…
- During planning of the audit of Narmada Retail Ltd, the engagement team learns that the company recently implemented a new ERP system and th…
- CA Anita is auditing Vistara Retail Ltd. She assesses a risk of material misstatement in revenue recognition and, after considering the natu…
- During the audit of Himalaya Foods Ltd, the auditor finds that the CFO, who also heads internal audit, overrides approval controls for journ…