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

Harlow Group's directors are under pressure to meet a covenant. The auditor notes that sales staff are shipping goods after the year end but dating invoices before it. Which statement is most accurate under ISA 240?

It is fraudulent financial reporting, with covenant pressure acting as a fraud risk factor. Deliberately backdating invoices to recognise revenue early is intentional misstatement. ISA 240 requires auditors to consider incentives or pressures, opportunity and rationalisation, and presumes revenue recognition is a fraud risk.

  1. AIt is fraudulent financial reporting, and the auditor should recognise the pressure as a fraud risk factor within the fraud triangleCorrect
  2. BIt is an error in cut-off, because the auditor cannot determine intent
  3. CIt is misappropriation of assets, because inventory has left the company
  4. DIt is outside ISA 240, because revenue cut-off is only an ISA 501 matter

Explanation

Intentionally backdating invoices to recognise revenue early is fraudulent financial reporting. The covenant pressure is an incentive/pressure factor in the fraud triangle, which ISA 240 uses when identifying risks. The auditor does not need to prove intent legally, and revenue recognition is presumed a fraud risk.

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