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

Zenith Retail Ltd is a new audit client. During planning, the audit senior notes that the finance director's bonus depends heavily on reported profit, and that the company has previously restated results. Under ISA 240, what is the most appropriate planning response?

The team should hold an engagement team discussion on how the financial statements could be materially misstated through fraud, applying professional scepticism. Bonus pressure and past restatements are fraud risk factors, and the auditor cannot rely solely on management's assurances or hand the assessment to internal audit.

  1. ATreat the risk of fraud as relevant only if management confirms in writing that fraud has occurred
  2. BDiscuss the susceptibility of the financial statements to material misstatement due to fraud within the engagement team, maintaining professional scepticismCorrect
  3. CRely on management's representation that no fraud risk factors exist, since the auditor is not responsible for detecting fraud
  4. DDelegate fraud risk assessment entirely to the client's internal audit function

Explanation

ISA 240 requires the engagement team to discuss how and where the financial statements may be susceptible to material misstatement due to fraud, with professional scepticism throughout. Incentive pressures such as profit-based bonuses are fraud risk factors. Relying on management representations alone, as in the third option, is inappropriate because the auditor cannot take management's assurance in place of its own assessment.

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