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

Marlow Audit is planning the audit of Tessera Ltd. Revenue recognition has been identified as a significant risk. Under ISA 240, which statement is correct about the presumption of fraud risk in revenue?

ISA 240 requires the auditor to presume fraud risks exist in revenue recognition and to evaluate which revenue types, transactions or assertions are affected. If the auditor concludes the presumption does not apply, the reasons for that conclusion must be documented. It is not limited to listed entities or to cases with prior errors.

  1. AThe auditor presumes there are risks of fraud in revenue recognition and evaluates which types of revenue, transactions or assertions give rise to such risks; if the presumption is rebutted, the reasons must be documentedCorrect
  2. BThe presumption applies only to listed entities and only where management has a bonus scheme
  3. CThe auditor may disregard the presumption without documentation if the entity has strong internal controls
  4. DThe presumption applies to revenue only when prior-year misstatements have been identified

Explanation

ISA 240 requires the auditor to presume there are fraud risks in revenue recognition and to evaluate which revenue types or assertions give rise to them. If the auditor concludes the presumption does not apply in the circumstances, the reasons must be documented. Limiting it to listed entities or prior errors, as the other options do, has no basis in the standard.

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