Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p20
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 20/41)
Character Range: 67015–69979

result also from an understatement of revenues through, for example, improperly shifting revenues to a later period.

A30.         The risks of fraud in revenue recognition may be greater in some entities than others.  For example, there may be pressures or incentives on management to commit fraudulent financial reporting through inappropriate revenue recognition in the case of listed entities when, for example, performance is measured in terms of year‑over‑year revenue growth or profit.  Similarly, for example, there may be greater risks of fraud in revenue recognition in the case of entities that generate a substantial portion of revenues through cash sales.

A31.         The presumption that there are risks of fraud in revenue recognition may be rebutted.  For example, the auditor may conclude that there is no risk of material misstatement due to fraud relating to revenue recognition in the case where there is a single type of simple revenue transaction, for example, leasehold revenue from a single unit rental property.

Identifying and Assessing the Risks of Material Misstatement Due to Fraud and Understanding the Entity's Related Controls (Ref: Para. 28)

A32.         Management may make judgements on the nature and extent of the controls it chooses to implement, and the nature and extent of the risks it chooses to assume.[21]  In determining which controls to implement to prevent and detect fraud, management considers the risks that the financial report may be materially misstated as a result of fraud.  As part of this consideration, management may conclude that it is not cost effective to implement and maintain a particular control in relation to the reduction in the risks of material misstatement due to fraud to be achieved.

A33.         It is therefore important for the auditor to obtain an understanding of the controls that management has designed, implemented and maintained to prevent and detect fraud.  In identifying the controls that address the risks of material misstatement due to fraud, the auditor may learn, for example, that management has consciously chosen to accept the risks associated with a lack of segregation of duties.  Information from identifying these controls, and evaluating their design and determining whether they have been implemented, may also be useful in identifying fraud risks factors that may affect the auditor's assessment of the risks that the financial report may contain material misstatement due to fraud.

Responses to the Assessed Risks of Material Misstatement Due to Fraud

Overall Responses (Ref: Para. 29)

A34.         Determining overall responses to address the assessed risks of material misstatement due to fraud generally includes the consideration of how the overall conduct of the audit can reflect increased professional scepticism, for example, through:

           * Increased sensitivity in the selection of the nature and extent of documentation to be examined