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

In auditing Kestrel Foods plc, the auditor identifies that revenue recognition is a significant risk. Under ISA 240, which approach to revenue is correct?

ISA 240 presumes fraud risks in revenue recognition. The auditor may conclude the presumption does not apply in the circumstances only if the reasons for that conclusion are documented. It is not limited to bonus schemes or service entities, and strong controls do not automatically rebut it.

  1. APresume a fraud risk in revenue recognition, and conclude it does not apply only if the rebuttal is documented with reasonsCorrect
  2. BAssume revenue fraud risk exists only where management bonuses depend on revenue targets
  3. CTreat revenue fraud risk as relevant only to service entities, not to goods sellers
  4. DRebut the presumption automatically where the entity has strong internal controls over sales

Explanation

ISA 240 requires the auditor to presume there are fraud risks in revenue recognition and evaluate which types of revenue, transactions or assertions give rise to them. If the auditor concludes the presumption is not applicable, the reasons must be documented. Strong controls alone do not automatically rebut the presumption, and it is not limited to bonus-driven or service entities.

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