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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

Ritu & Associates audits Delta Logistics Ltd, a listed company. During planning, the auditor finds that the CFO has set aggressive profit targets linked to his bonus and has recently instructed the accounts team to defer certain expense bookings. Which response is most consistent with SA 240 and SA 315 (Revised)?

The auditor should treat the CFO's bonus-linked targets and instructions to defer expenses as fraud risk factors. The engagement team discusses them, assesses the fraud risk, and designs responses such as journal entry testing and cut-off tests under SA 240, instead of ignoring them or taking disproportionate steps.

  1. ATreat the matter as a risk of fraud, discuss it within the engagement team, assess fraud risk factors and design procedures including testing journal entries and period-end cut-offCorrect
  2. BIgnore it, as detecting fraud is entirely the management's responsibility
  3. CReport the matter to the police before any further audit work
  4. DReduce the materiality to zero for the whole audit

Explanation

Incentive or pressure on management together with an instruction to defer expenses are fraud risk factors. SA 240 requires the team to discuss susceptibility to fraud, assess the risks, treat management override as a presumed risk, and test journal entries and cut-off. Setting materiality to zero or reporting to police at once is neither required nor practical.

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