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CA Final · Advanced Auditing, Assurance and Professional Ethics · Materiality, Risk Assessment and Internal Control

Auditor Meera Iyer is evaluating Zenith Foods Pvt Ltd's risk assessment process under SA 315. The company is small, and management identifies risks informally through the owner-manager's regular discussions. How should Meera judge whether this process is adequate?

The auditor should judge whether the process is appropriate to the entity's circumstances, including nature, size and complexity. SA 315 treats this as a matter of judgment, so neither a formal documentation requirement nor the entity's small size decides adequacy automatically.

  1. AIt is inadequate because only a formal documented process can be accepted
  2. BIt is adequate by default because the entity is small
  3. CWhether the process is appropriate to the circumstances, including nature, size and complexity, is a matter of judgmentCorrect
  4. DAdequacy is decided by those charged with governance, not by the auditor

Explanation

SA 315 states that if the entity's risk assessment process is appropriate to the circumstances, including nature, size and complexity, it helps the auditor identify risks of material misstatement, and that its appropriateness is a matter of judgment. Formality is not mandatory, and size alone does not make it adequate. The auditor must form their own judgment.

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