Part A:

Background

According to ASA 240 The auditor’s responsibilities relating to fraud in an audit of a financial report (para. 27):

‘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.’

(https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf)

Required:

Write a letter to your Audit Manager Mr Bobby Brown in which you address the following:

1. Relying on the information in ASA 240 (refer to link above). Explain the difference between the responsibility of management and those charged with governance and the auditor in relation to the prevention and detection of fraud.

2. Discuss the misconception that exists in society surrounding the role of the auditor in relation to the prevention and detection of fraud in an audit of financial statements.

3. Provide three reasons why an auditor presumes that there are potential risks of fraud relating to revenue recognition in entities. Make sure that you explain your reasons clearly.

4. Provide two case examples of revenue misstatements that have been reported in the media.