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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

Kestrel plc's auditor is planning the audit of revenue. Management bonuses depend heavily on reported revenue, and the sales director has overridden controls in the past. Which response is required by ISA 240 and ISA 315 regarding revenue?

The auditor presumes a fraud risk in revenue recognition, evaluates which revenue types or assertions are affected, and treats identified fraud risks as significant risks. The presumption can be rebutted only with documented reasons, and management representations alone are not enough.

  1. APresume a fraud risk in revenue recognition unless rebutted, and if it is not rebutted treat it as a significant riskCorrect
  2. BTreat revenue as a low risk because it is a high-volume, routine class of transactions
  3. CAssume the risk is limited to the cut-off assertion and perform no further procedures
  4. DRely on management's representation that revenue is fairly stated

Explanation

ISA 240 requires the auditor to presume there are risks of fraud in revenue recognition and to evaluate which types of revenue or assertions give rise to them. Such fraud risks are treated as significant risks. Where the presumption is rebutted, the reasons must be documented. Management representations are not sufficient evidence.

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