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

While auditing Himalaya Foods Ltd., auditor Meera identifies that revenue recognition near the year-end involves a high risk of fraud through premature booking of sales. Under SA 240 and SA 315 (Revised), how should she treat this risk?

She should treat it as a significant risk and obtain an understanding of the related controls, including control activities. SA 240 presumes fraud risk in revenue recognition, and SA 315 (Revised) requires understanding controls relevant to significant risks, so the audit response must be specifically designed for it.

  1. ATreat it as a significant risk and obtain an understanding of related controls, including relevant control activitiesCorrect
  2. BTreat it as a low risk because a presumed fraud risk applies only to management override
  3. CIgnore controls and rely only on management representation
  4. DReport it to the Registrar of Companies before completing the audit

Explanation

SA 240 presumes risks of fraud in revenue recognition, and such risks are treated as significant risks. SA 315 (Revised) requires the auditor to understand the entity's controls relevant to significant risks. Reporting to the Registrar is not a first step and is not the audit response to risk identification.

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