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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Evidence and testing considerations

While auditing Corvid Retail's expected credit loss allowance, the auditor notes that management changed a key assumption this year, lowering default rates, which increased profit just enough to meet a bonus target. Which ISA 540 (Revised) requirement is most directly relevant to this observation?

The auditor must evaluate whether the judgements and decisions in making the estimate indicate possible management bias. The change coinciding with a bonus target is an indicator, so the auditor considers the effect on the financial statements and audit implications, even if the assumption sits within an acceptable range.

  1. AEvaluate whether judgements and decisions in making the estimates indicate possible management biasCorrect
  2. BDisregard the change because the estimate falls within an acceptable range
  3. CConclude that fraud has occurred and withdraw from the engagement
  4. DReport the change only to the audit committee without evaluating misstatement

Explanation

ISA 540 (Revised) requires the auditor to evaluate whether judgements and decisions indicate possible management bias, even if individually reasonable, and to consider the implications for the audit. Falling within a range does not remove the bias concern. Bias is not itself conclusive proof of fraud, and communication does not replace evaluating misstatement.

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