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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reports to those charged with governance and management

During the audit of Karlow Co, the audit team identifies that the company's purchase ledger clerk can both create new suppliers and approve payments to them. The audit senior is unsure how to treat this under ISA 265. Which of the following is the correct approach?

The auditor should evaluate whether the segregation of duties deficiency, alone or combined with others, is a significant deficiency. If it is, ISA 265 requires written communication to those charged with governance on a timely basis. It does not depend on a fraud having occurred, and it is not automatically a key audit matter.

  1. ADetermine whether this deficiency, individually or in combination with others, constitutes a significant deficiency, and if so communicate it in writing to those charged with governance on a timely basisCorrect
  2. BCommunicate it orally to management only, because segregation of duties issues are never significant
  3. CInclude it in the auditor's report as a key audit matter in every case
  4. DCommunicate it only if the auditor has already identified an actual fraud arising from it

Explanation

ISA 265 requires the auditor to evaluate whether identified deficiencies, individually or in combination, are significant deficiencies. Significant deficiencies must be communicated in writing to those charged with governance on a timely basis. Limiting the communication to management or waiting for a fraud is not what the standard requires.

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