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

In the audit of Brightwater Foods, the engagement team discusses where the financial statements might be susceptible to fraud. Which approach is required by ISA 240 in relation to revenue recognition?

The auditor must presume there are fraud risks in revenue recognition and evaluate which revenue types or assertions are affected. Where the presumption is judged not applicable, the conclusion and reasons must be documented. Good controls or management representations do not remove this requirement.

  1. APresume a fraud risk in revenue recognition, and document the reasons if the presumption is concluded not to apply.Correct
  2. BAssume revenue fraud occurs only in listed entities and ignore it otherwise.
  3. CTreat revenue as low risk if the client has a good control environment.
  4. DRely on management representations to conclude on revenue fraud risk.

Explanation

ISA 240 requires the auditor to presume fraud risks in revenue recognition and evaluate which types of revenue, transactions or assertions give rise to them. If the auditor concludes the presumption does not apply, the reasons must be documented. A good control environment or representations do not remove the presumption.

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