Audit and Assurance Practice Exam

What should auditors focus on when fraud risk is suspected during revenue auditing?

1. Implementing strict internal controls only.

2. Relying solely on management assertions.

3. Collecting sufficient evidence through detailed testing.

4. Regulatory compliance checks alone.

The correct answer is: Collecting sufficient evidence through detailed testing.

When fraud risk is suspected during revenue auditing, auditors should prioritize collecting sufficient evidence through detailed testing to address potential irregularities in revenue recognition. This focus is critical because detailed testing of transactions and balances allows auditors to uncover discrepancies, anomalies, or fraudulent activities that could misrepresent the company's revenue. Through a comprehensive assessment, auditors can apply various procedures such as substantive tests, analytical reviews, and inquiry methods to gather adequate evidence. By focusing on this evidence collection, auditors enhance their ability to evaluate the validity of reported revenues and understand the economic substance of transactions, rather than merely accepting information at face value or relying on potentially biased management assertions. While implementing strict internal controls or performing regulatory compliance checks are essential aspects of an overall audit strategy, these measures alone do not suffice in the face of suspected fraud. Internal controls may not function effectively if there is a willingness to bypass them for fraudulent purposes. Regulatory compliance checks do not directly address the core issue of potential misstatement due to fraud. Thus, the most effective approach when fraud risk is suspected is to engage in rigorous evidence collection through detailed testing, ensuring that auditors are able to substantiate their findings thoroughly.