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

In the audit of Himalaya Cements Ltd, CA Neha discovers a misstatement through her substantive procedures that the company's internal controls neither prevented nor detected and corrected. Separately, the board has not acted on a significant deficiency communicated last year. Which conclusion is correct under SA 265?

Both are indicators of significant deficiencies under SA 265. A misstatement found by the auditor that internal control did not prevent, or detect and correct, is one indicator, and management's failure to act on previously communicated significant deficiencies is another, so both support the conclusion.

  1. ANeither fact is an indicator, as significant deficiencies arise only from fraud
  2. BOnly the misstatement is an indicator; ignoring earlier communicated deficiencies is irrelevant
  3. COnly the unremedied prior deficiency is an indicator; the misstatement is a substantive matter only
  4. DBoth facts are indicators of significant deficienciesCorrect

Explanation

SA 265 lists misstatements detected by the auditor's procedures that the entity's controls did not prevent, or detect and correct, and management's failure to implement remedial action on significant deficiencies previously communicated. Both appear among the indicators, so excluding either is wrong.

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