Correct Answer Explanation:

When it comes to documenting fraud risk assessment in working papers, option b) stands as the most accurate choice. Here’s why:

b) Document the identification of fraud risk factors along with response to them.

This answer aligns well with best practices in auditing. When conducting a fraud risk assessment, it’s crucial to identify potential risk factors that could lead to fraudulent activities. These risk factors might involve opportunities, pressures, or rationalizations that could result in fraud.

Simply identifying these risks isn’t enough; auditors should also document the responses or actions taken to address or mitigate these risks. This documentation serves as evidence of due diligence in addressing potential fraud and forms a critical part of the audit trail.

Now, let’s explore why the other options are not as fitting:

a) All risk factors as mentioned in AAS-4 should be considered and documented along with response to them.

While considering all risk factors outlined in AAS-4 is beneficial, it’s not always necessary or practical to document every single risk factor. AAS-4 provides guidelines, but auditors should exercise professional judgment to focus on relevant and material fraud risks specific to the entity being audited.

Documenting all factors might lead to an excessively detailed report that may not necessarily enhance the quality or efficiency of the audit process.

c) Document material fraud risk factors and response to them.

This option narrows the focus to material fraud risk factors only. While material risks are indeed critical to document, there might be non-material risks that, when combined or considered collectively, could pose a significant threat.

Focusing solely on material risks might overlook smaller risks that, when combined, could escalate into a substantial issue.

d) No documentation is required.

This choice is incorrect. Documentation is a fundamental aspect of any audit process, especially concerning fraud risk assessment. Proper documentation provides a clear trail of the auditor’s work, reasoning, and actions taken during the assessment.

It also helps in reviews, supports the conclusions reached, and ensures accountability and transparency in the auditing process.

In essence, while considering and documenting all risk factors might be excessive, focusing solely on material risks might overlook potential threats.

Therefore, the most appropriate approach is to identify relevant fraud risk factors and document both their identification and the responses undertaken to address or mitigate them. This balanced approach ensures comprehensive coverage while avoiding unnecessary detail or oversight.