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

CA Rao audited Delta Realty Ltd last year and communicated to the board a significant deficiency in controls over related party approvals. This year he finds management has taken no remedial action and again significant transactions in which the managing director is financially interested were not scrutinised by those charged with governance. What is the most appropriate conclusion?

Failure to act on previously communicated significant deficiencies, and lack of scrutiny by those charged with governance of transactions in which management is financially interested, are both indicators of significant deficiencies. The auditor should communicate them to those charged with governance, not just to the interested managing director.

  1. ABecause the deficiency was already communicated, no further communication is needed
  2. BOnly the earlier deficiency matters; the new transactions are outside SA 265
  3. CThe deficiency should be reported only to the managing director, who is the interested party
  4. DBoth are indicators of ineffective control environment and significant deficiencies; the auditor should communicate them to those charged with governanceCorrect

Explanation

SA 265 lists management's failure to implement remedial action on previously communicated significant deficiencies, and inadequate scrutiny by those charged with governance of transactions in which management is financially interested, as indicators of significant deficiencies. Reporting only to the interested managing director would defeat the purpose. Prior communication does not remove the need to communicate the continuing matter.

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