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

During the audit of Meridian Foods Ltd, CA Neha detects a material misstatement in inventory valuation that the entity's controls neither prevented nor detected. Management also had not acted on a significant deficiency in stock count controls that she had reported last year. Which is the best conclusion under SA 265?

Both matters are indicators of significant deficiencies under SA 265: a misstatement the controls failed to prevent or detect, and management's failure to remedy a previously communicated deficiency. The auditor should therefore communicate them in writing to those charged with governance on a timely basis.

  1. ABoth matters are indicators of significant deficiencies, so she should communicate them in writing to those charged with governance on a timely basisCorrect
  2. BOnly the misstatement is an indicator, and the unremedied prior deficiency is irrelevant
  3. CSince the misstatement was corrected after her finding, no communication is required
  4. DBoth matters should be communicated orally to management only

Explanation

SA 265 lists both misstatements detected by the auditor that the entity's controls did not prevent or detect and correct, and management's failure to remedy previously communicated significant deficiencies, as indicators of significant deficiencies. Option C is wrong because later correction does not cure the control failure, so communication is still needed.

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