ACCA Strategic Professional · Advanced Audit and Assurance (International) · Fraud and error
Marlow Components plc has a new finance director whose bonus depends on reaching a profit target. Revenue is recognised on delivery, and in the final week of the year sales to a few new customers increased sharply. Under ISA 240, how should the auditor treat the risk of fraud in revenue recognition?
The auditor presumes a fraud risk in revenue recognition and treats it as a significant risk. The presumption can be rebutted only if circumstances justify it, with documentation. The bonus pressure and the year-end sales spike here make rebuttal inappropriate.
- APresume it is a fraud risk and treat it as a significant risk, rebutting it only if circumstances justify and documenting whyCorrect
- BTreat it as a significant risk only if the bonus target is disclosed to the auditor
- CAssume it is a risk only for the cut-off assertion and apply no further procedures to other assertions
- DTreat it as a risk of error, since fraud risk applies only to management override
Explanation
ISA 240 requires the auditor to presume there are fraud risks in revenue recognition, evaluate which types of revenue, transactions or assertions give rise to them, and treat identified fraud risks as significant risks. The presumption may be rebutted only where justified and documented. Here the bonus incentive and year-end spike strengthen it. Limiting it to cut-off or to management override is incorrect.
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