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

During planning of the audit of Narmada Foods Pvt Ltd, the auditor identifies that revenue recognition is a significant risk because management is under pressure to meet a lender's covenant. Under SA 315 (Revised), what is the most appropriate response regarding the auditor's understanding of controls?

The auditor should evaluate the design of controls relevant to the significant revenue risk and determine whether they have been implemented. SA 315 requires this understanding for significant risks, but it does not require testing every control in the entity.

  1. AEvaluate the design of the controls relevant to that significant risk and determine whether they have been implementedCorrect
  2. BIgnore controls and rely only on analytical procedures at year-end
  3. CTest operating effectiveness of all controls across the entity regardless of relevance
  4. DDefer understanding of controls until the audit report is being drafted

Explanation

For significant risks, SA 315 requires the auditor to understand the entity's controls relevant to that risk, evaluating their design and determining implementation. Testing all controls is not required, and deferring understanding until reporting defeats risk assessment.

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