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

During the audit of Bharat Steels Ltd, the auditor planned to rely on the operating effectiveness of controls over purchase approvals and reduce substantive testing. Tests of controls reveal that approvals were bypassed in a sizeable number of sampled cases. What is the most appropriate response?

The auditor should revise the control risk assessment upward and increase substantive procedures on purchases and payables. When tests of controls show ineffective operation, SA 330 requires the planned nature, timing and extent of substantive testing to be modified rather than relying on the controls.

  1. AReassess control risk as higher and perform more extensive substantive procedures on purchases and payablesCorrect
  2. BContinue with the planned reduced substantive procedures because deviations are only a management matter
  3. CWithdraw from the engagement immediately
  4. DIncrease only the sample size of tests of controls until deviations disappear

Explanation

Under SA 330, if tests of controls show that controls are not operating effectively, the auditor revises the risk assessment and modifies the planned nature, timing and extent of substantive procedures. Ignoring the deviations would leave audit risk unmanaged, and enlarging the control sample will not make controls effective. Withdrawal is not warranted by deviations alone.

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