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

During the audit of Sundaram Retail Ltd, the auditor tests the control that requires a second official to approve every purchase order above ₹1,00,000. The auditor inspects a sample of orders and finds several above that limit approved by only one official. Having planned to rely on this control, what is the most appropriate response?

The auditor should reassess control risk as higher, since the tests of controls found deviations that undermine planned reliance, and then perform more extensive substantive procedures on purchases and payables. Continuing to rely on the control, stopping testing or reporting to the Registrar is not the proper first response.

  1. AReassess control risk as higher and perform more extensive substantive procedures on purchases and payablesCorrect
  2. BContinue to rely on the control because the sample is only a part of the population
  3. CReport the matter directly to the Registrar of Companies
  4. DDiscontinue all further testing of purchases

Explanation

When tests of controls reveal deviations, the planned reliance is not supported. The auditor reconsiders the risk assessment, treats control risk as higher and expands substantive procedures. Reporting to the Registrar is not the immediate response, and stopping testing would be inappropriate.

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