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

In the audit of Bharat Steel Ltd, the auditor finds that the company's year-end review process failed to identify a lease-classification risk that the auditor would expect any reasonable risk assessment process to catch. A material error in an earlier year was also reported as a prior period item in this year's Statement of Profit and Loss. Management had not acted on a significant deficiency communicated last year. What is the most appropriate conclusion under SA 265?

All three matters are listed in SA 265 as indicators of significant deficiencies: failure to identify an expected risk, a material misstatement disclosed as a prior period item, and no remedial action on earlier communicated deficiencies. The auditor should therefore communicate them in writing to those charged with governance.

  1. AThese are only isolated errors and are not indicators of significant deficiencies
  2. BOnly the prior period item is an indicator; the other two matters are not
  3. CEach matter is an indicator of a significant deficiency, so the auditor should communicate in writing to those charged with governanceCorrect
  4. DThe auditor should communicate them only to management, as they relate to accounting, not governance

Explanation

SA 265 lists as indicators: an ineffective risk assessment process (failure to identify a risk the auditor would expect to be identified), disclosure of a material misstatement as a prior period item, and management's failure to remedy previously communicated significant deficiencies. All three are present, so they point to significant deficiencies to be communicated in writing to those charged with governance. Treating only one as an indicator ignores the other two.

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