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

In auditing Ganga Realty Ltd, the auditor notes the following: (i) a related-party land purchase in which the managing director is financially interested was approved with no scrutiny by those charged with governance; (ii) management has not fixed a deficiency communicated in the previous year's audit; (iii) the entity's own risk process missed a risk the auditor would have expected it to identify. Which conclusion is correct under SA 265?

All three are indicators of significant deficiencies under SA 265. The standard lists inadequate scrutiny of transactions in which management is financially interested, failure to remedy previously communicated deficiencies, and an entity risk assessment that misses an expected risk. A misstatement need not have occurred.

  1. AEach of the three is an indicator of a significant deficiency in internal controlCorrect
  2. BOnly (i) is an indicator, because the others relate to management rather than governance
  3. COnly (ii) and (iii) are indicators, because (i) concerns a transaction rather than a control
  4. DNone is an indicator unless a material misstatement has actually occurred

Explanation

SA 265 lists all three among its indicators. They are: significant transactions in which management is financially interested not being scrutinised by those charged with governance, failure to remedy previously communicated significant deficiencies, and an ineffective risk assessment process that misses an expected risk. No actual misstatement is required for an item to be an indicator.

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