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

The auditor of Sundaram Pharma Ltd identifies revenue recognition as a presumed fraud risk under SA 240. Which response is correct under SA 315 (Revised)?

A fraud risk in revenue is a significant risk. The auditor must understand the related controls, assess their design and implementation, and perform substantive procedures that specifically respond to the risk. Reliance on controls alone or on internal audit is not adequate for such a risk.

  1. ATreat it as a significant risk, evaluate the design and implementation of related controls, and perform substantive procedures responsive to itCorrect
  2. BTreat it as a low risk because fraud risk is management's responsibility alone
  3. CTest only the operating effectiveness of controls and perform no substantive procedures
  4. DIgnore the risk if the client has an internal audit department

Explanation

Fraud risks are significant risks. The auditor must obtain an understanding of related controls, including their design and implementation, and respond with substantive procedures specifically addressing the risk. Relying only on controls or on internal audit does not respond adequately to a significant risk.

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