Which of the following scenarios most likely creates a 'presumption of fraud risk' in revenue recognition that the auditor must address?

Answer options:

The company sells standard goods with fixed prices and no right of return.

The company has complex bundling arrangements where the allocation of revenue is highly subjective.

Revenue has increased by 2% consistent with industry averages.

The company switched to a new ERP system for billing.

How to approach this question

Identify the 'Fraud Triangle' elements: Incentive, Opportunity, Rationalization. Subjectivity creates Opportunity.

Full Answer

B.The company has complex bundling arrangements where the allocation of revenue is highly subjective.✓ Correct

The company has complex bundling arrangements where the allocation of revenue is highly subjective.

SAS 122 (AU-C 240) states there is a rebuttable presumption that revenue recognition involves fraud risk. This risk is most acute where there is complexity and subjectivity (Opportunity), such as in bundled arrangements with subjective allocations. This allows management to manipulate timing or amounts.

Common mistakes

Confusing general business risks (new ERP) with specific fraud risks (manipulation of estimates).

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