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

During the audit of Sundaram Engineering Ltd, the auditor identifies a significant risk relating to revenue recognition on long-term contracts. Management has not designed any control over this risk. How should the auditor view this under SA 265?

The absence of any control over an identified significant risk is evidence of an ineffective response to that risk, and SA 265 treats it as an indicator of a significant deficiency. Substantive procedures by the auditor do not remove the deficiency or the need to communicate it.

  1. AAs an indicator of a significant deficiency, being evidence of an ineffective response to an identified significant riskCorrect
  2. BAs a minor matter, since controls are needed only for routine transactions
  3. CAs a deficiency that need not be communicated if the auditor performs substantive procedures
  4. DAs relevant only if the Board has previously raised the issue

Explanation

SA 265 lists the absence of controls over an identified significant risk as evidence of an ineffective response, which indicates a significant deficiency. Performing substantive procedures does not remove the deficiency or the need to communicate it.

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