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Miss, thank you for your fast reply of last 2 thread and I understand now.
In term of the fraud under ISA 240, there are two quoted paragraph in the bpp textbook
“ISA 240: para. 26 When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.”
“ISA 240: para. 27
The auditor shall treat those assessed risks of material misstatement due to fraud as significant risks and accordingly, to the extent not already done so, the auditor shall obtain an understanding of the entity’s related controls, including control activities, relevant to such risks.”Is it mean that the fraud related to the revenue recognition is always treated as a significant risk not consider its materiality or no matter the amount involved? Is it even it’s involved of only a small amount, is it still treated as material misstatement?
Thank you.
Think about your question. Imagine a set of financial statements for any company (i.e. assuming a profit motive). Where would you most likely find the greatest reported amount for a single line item? With the possible exception of retained earnings I suggest it would be revenue – unless the company has ceased trading/is dormant.
So there is a clear reason for this presumption.
So if an exam question related to the audit risk , then there is a fraud related to the revenue which is not material. Should we consider the materiality of the fraud related to the revenue or assume its significant risk?
It must be considered a significant risk at the planning stage …
ISA 240 says that the risk of fraud in revenue should be presumed. This presumption does not depend on the discovery of a fraud – e.g. the mere fact that a large proportion of revenue is from cash sales means that this is a significant risk area.
If there happened to be an immaterial fraud in revenue you couldn’t “dismiss” the presumption – revenue is still – perhaps even more (!) a significant risk (what about all the other potential frauds that haven’t been discovered?)
If at the END of the audit, after all the audit evidence has been obtained, the effect of a fraud on revenue is immaterial it will not affect the audit opinion – but you can’t know at the PLANNING stage that that will be your conclusion.
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