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

In auditing Orchid Retail Ltd, CA Imran finds that management did not identify a risk of material misstatement from a new revenue arrangement, one that he would expect its risk assessment process to have identified. Under SA 265 and SA 315, what does this indicate?

It indicates an ineffective entity risk assessment process, which SA 265 treats as an indicator of a significant deficiency. The auditor should still assess the risk himself and communicate the deficiency to those charged with governance.

  1. APossible ineffectiveness of the entity's risk assessment process, which is an indicator of a significant deficiencyCorrect
  2. BThat the auditor must withdraw from the engagement
  3. CThat the risk need not be considered because management did not identify it
  4. DThat the entity's control environment is necessarily effective

Explanation

SA 265 lists management's failure to identify a risk of material misstatement that the auditor would expect the process to identify as evidence of an ineffective risk assessment process, an indicator of a significant deficiency. Option C is wrong because the auditor must still assess the risk independently.

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