Specific Responses—Misstatement ResultinSpecific Responses—Misstatement Resulting from Fraudulent Financial Reporting

Specific Responses—Misstatement Resulting from Fraudulent Financial Reporting

Examples of responses to the auditor’s assessment of the risks of material misstatement due to fraudulent financial reporting are as follows:

Revenue Recognition

 Performing substantive analytical procedures relating to revenue using disaggregated data, for example, comparing revenue reported by month and by product line or business segment during the current reporting period with comparable prior periods. Automated tools and techniques may be useful in identifying unusual or unexpected revenue relationships or transactions.

 Confirming with customers certain relevant contract terms and the absence of side agreements, because the appropriate accounting often is influenced by such terms or agreements and basis for rebates or the period to which they relate are often poorly documented. For example, acceptance criteria, delivery and payment terms, the absence of future or continuing supplier obligations, the right to return the product, guaranteed resale amounts, and cancellation or refund provisions often are relevant in such circumstances.

 Enquiring of the entity’s sales and marketing personnel or in-house legal counsel regarding sales or shipments near the end of the period and their knowledge of any unusual terms or conditions associated with these transactions.

 Being physically present at one or more locations at period end to observe goods being shipped or being readied for shipment (or returns awaiting processing) and performing other appropriate sales and inventory cut-off procedures.

 For those situations for which revenue transactions are electronically initiated, processed, and recorded, testing controls to determine whether they provide assurance that recorded revenue transactions occurred and are properly recorded.

 Examining customer correspondence files at the entity for any unusual terms or conditions that raise questions about the appropriateness of revenue recognised.

 Analysing the reasons provided for product returns received shortly after the end of the financial year (e.g., product not ordered, entity shipped more units than ordered).

 Determining whether revenue transactions are recorded in accordance with the applicable financial reporting framework and the entity’s accounting policies. For example, goods shipped are not recorded as sales unless there is a transfer of legal title in accordance with the shipping terms especially in circumstances when the entity uses a freight forwarder or a third-party warehouse or fulfillment centre.

Inventory Quantities

 Examining the entity’s inventory records to identify locations or items that require specific attention during or after the physical inventory count.