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

During the audit of Sundaram Pharma Ltd., the auditor identifies a significant risk relating to revenue recognition near the year end. Under SA 315 (Revised), what is the auditor's required approach to the controls relevant to this significant risk?

The auditor must obtain an understanding of the entity's controls, including control activities, relevant to the significant risk. SA 315 (Revised) requires this for significant risks, and management representations or year-end analytics alone cannot substitute for it.

  1. AObtain an understanding of the entity's controls relevant to that risk, including control activitiesCorrect
  2. BIgnore the controls and rely only on analytical procedures at the year end
  3. CTest controls only if the management representation letter confirms they operate effectively
  4. DObtain an understanding of controls only for risks that the auditor assesses as low

Explanation

SA 315 (Revised) requires the auditor to understand the entity's controls, including control activities, relevant to significant risks. Management representation cannot replace this understanding. The last option is reversed, since the requirement applies to significant risks, not only to low-risk areas.

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