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

During the audit of Sundaram Retail Ltd, the auditor finds that the same accounts officer raises purchase orders, receives goods and approves supplier payments. The auditor wants to classify the deficiency and respond appropriately. Which response is correct?

The auditor should treat it as a lack of segregation of duties, a control deficiency raising the risk of error or fraud, and respond by assessing control risk higher and performing more substantive procedures on purchases and payables. It is neither irrelevant nor a reason for automatic withdrawal.

  1. ATreat it as a lack of segregation of duties, a control deficiency that increases the risk of misstatement from error or fraud, and consider more substantive procedures on purchases and payablesCorrect
  2. BIgnore it, since segregation of duties is only a concern for banks
  3. CConclude that control risk is low because one trusted person handles the entire cycle efficiently
  4. DWithdraw from the engagement immediately without evaluating the deficiency

Explanation

Combining authorisation, custody and recording duties defeats segregation of duties and raises the risk of undetected error or fraud. The auditor should evaluate the deficiency, assess control risk higher and extend substantive procedures. It is not limited to banks, efficiency is not a control, and withdrawal is not the automatic response.

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