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

Oakfield Foods Ltd has a CEO bonus that depends entirely on reported operating profit margin, which management reviews monthly as its key performance measure. The auditor is applying ISA 315 (Revised 2019) on the entity's measures of financial performance. Which conclusion is most appropriate?

The auditor should recognise that a bonus tied to operating margin creates incentive or pressure on management, a fraud risk factor, and consider the resulting risks of material misstatement in revenue and expenses. It does not remove the need to understand the control environment or require zero performance materiality.

  1. AThe measure is relevant only to the remuneration committee and not to the audit
  2. BThe measure indicates pressure on management, so the auditor should consider the risk of misstatement, including fraud risk factors, in the related balancesCorrect
  3. CThe measure removes the need to understand the control environment
  4. DThe measure means the auditor should set performance materiality to zero

Explanation

ISA 315 requires understanding of measures used internally and externally to assess performance because they can create pressure that motivates management to misstate. A bonus tied to margin is an incentive/pressure fraud risk factor, so the auditor considers risks in revenue and expense balances. Performance materiality is not set to zero, and the control environment understanding remains required.

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