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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Completion and final review

In the final analytical review of Harlow Co, the auditor notices that revenue has risen 20% on the prior year while trade receivables have risen 55% and the cost of sales ratio is unchanged. Management says it is due to a big customer being offered longer credit terms. Which action is most appropriate under ISA 520?

The auditor should corroborate management's explanation with evidence such as the agreed credit terms and cash received after the year end. ISA 520 requires inconsistent relationships to be investigated with appropriate evidence, so management's word alone is insufficient and a modified opinion would be premature.

  1. AAccept the explanation because management knows its customers best
  2. BInvestigate the unusual relationship by obtaining corroborating evidence for management's explanation, such as the credit term agreement and post year-end cash receiptsCorrect
  3. CIgnore the fluctuation because the cost of sales ratio is unchanged
  4. DImmediately issue a qualified opinion on revenue

Explanation

Where analytical procedures reveal fluctuations or relationships inconsistent with other information, ISA 520 requires the auditor to investigate by enquiring of management and obtaining appropriate audit evidence relevant to the responses. Management's explanation alone is insufficient, so corroboration through contracts and subsequent receipts is needed. A modification would be premature before investigation.

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