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

In Rudra Infra Ltd, the auditor communicated a significant deficiency in the contract revenue recognition controls last year. This year management has taken no remedial action, and the auditor also finds that a related-party land purchase in which the MD is financially interested was not scrutinised by the board. What is the most appropriate conclusion?

Both are indicators of significant deficiencies under SA 265. Failure to remedy previously communicated significant deficiencies and inadequate scrutiny by those charged with governance of transactions in which management is financially interested are listed as evidence of an ineffective control environment.

  1. ABoth matters are indicators of significant deficiencies, being management's failure to remedy previously communicated deficiencies and inadequate scrutiny of transactions in which management is financially interestedCorrect
  2. BOnly the land purchase is an indicator, as failure to remedy earlier deficiencies is a management choice
  3. CNeither matter is an indicator unless the amounts exceed overall materiality
  4. DBoth matters are matters for the Registrar of Companies, not for communication under SA 265

Explanation

SA 265 lists both management's failure to implement appropriate remedial action on previously communicated significant deficiencies and lack of scrutiny by those charged with governance of transactions in which management is financially interested as indicators of ineffective aspects of the control environment. The option excluding the first is wrong because it is expressly listed.

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