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

During the audit of Anand Foods Ltd, the auditor detects a misstatement in inventory valuation through substantive procedures. The entity's internal controls neither prevented nor detected and corrected it. What is the correct conclusion under SA 265?

A misstatement found by the auditor's procedures that the entity's internal control did not prevent, or detect and correct, is an indicator of a significant deficiency under SA 265. It applies whether or not fraud is involved, so the auditor should consider communicating it.

  1. AThe misstatement shows the auditor's procedures were ineffective, so controls need no evaluation
  2. BThis is an indicator of a significant deficiency in internal controlCorrect
  3. CThis is a deficiency only if the misstatement is fraudulent
  4. DSince the auditor corrected it through procedures, no communication issue arises

Explanation

SA 265 lists misstatements detected by the auditor's procedures that were not prevented, or detected and corrected, by the entity's internal control as an indicator of a significant deficiency. It is not limited to fraud. The auditor's detection does not remove the control weakness.

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