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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

CA Anita is auditing Vistara Retail Ltd. She assesses a risk of material misstatement in revenue recognition and, after considering the nature of the risk, decides it requires special audit consideration because it involves significant judgement and the risk of management override. Which response is most appropriate under SA 315 (Revised) and SA 330?

Revenue with a significant risk requires the auditor to understand the related controls and perform substantive procedures specifically responsive to that risk, including tests of details where only substantive procedures are used. Reliance on substantive analytical procedures alone, or on unrefreshed prior-year control evidence, is not sufficient.

  1. ATreat it as a significant risk, obtain understanding of the related controls, and perform substantive procedures that specifically respond to it, not relying solely on substantive analytical proceduresCorrect
  2. BTreat it as a normal risk and rely only on substantive analytical procedures
  3. CRely entirely on tests of controls from the prior year without updating
  4. DExclude revenue from testing since the risk is too high to audit

Explanation

For significant risks the auditor must understand the relevant controls and perform substantive procedures specifically responsive to the risk; SA 330 states that if the approach consists only of substantive procedures, they must include tests of details. Relying only on analytical procedures is inadequate, prior-year control evidence cannot be used without updating for significant risks, and the area cannot be excluded.

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