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During the year the company introduced a bonus based on sales for its sales team. The bonus target was based on increasing the number of customers signing up for 24?month phone line contracts. This strategy has been successful and revenue has increased by 15% compared with 20X4. In particular, there has been a significant increase in sales in May and June 20X5.
Which of the following is an appropriate explanation of the audit risk relating to the bonus
for Flute Co’s sales team?
1 There is an increased risk of inappropriate cut?off of revenue- right answer
2 There is an increased risk of non?response from customers following direct confirmation audit testing- my answer
maam why is the 2nd option not the answer? there is risk that increased sales may have been generated by setting up fictitious customers- hence the non-response! so then why not statement 2…
It asks for risk ARISING – i.e. what increases RoMM.
Your selection affects DR – not RoMM.
See the depiction of the relationship between the components of audit risk in Chapter 9.
maam the question is related to audit risk(associated with bonus), which comprises of both RoMM and DR.
maam can you pls elaborately explain if possible why my answer is incorrect? Am sincerly sorry but i am very confused as to why my answer is incorrect!
The scenario depicts the risk of overstatement of revenue in the FS – this is RoMM.
Increased “risk” of non-responses has nothing to do with RoMM. In any case, the auditor wouldn’t do less work if there are non-responses, rather the auditor would have to do more work to obtain evidence from alternative procedures.