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

CA Vikram is auditing Lotus Retail Ltd. He finds that a related-party transaction in which the managing director is financially interested was approved without any scrutiny by those charged with governance. How should this be treated under SA 265?

This is an indicator of a significant deficiency. SA 265 treats the lack of appropriate scrutiny by those charged with governance over significant transactions in which management is financially interested as evidence of an ineffective control environment, so the auditor should treat and communicate it accordingly.

  1. AAs an indicator of a significant deficiency arising from an ineffective control environmentCorrect
  2. BAs an indicator only if the amount exceeds materiality
  3. CAs acceptable because the managing director approves transactions
  4. DAs a matter relevant only to the auditor's report on the company's remuneration

Explanation

SA 265 lists indications that significant transactions in which management is financially interested are not appropriately scrutinised by those charged with governance as evidence of an ineffective control environment, which is an indicator of a significant deficiency. The text does not make this depend on a materiality threshold.

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