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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

In the audit of Meera Pharma Ltd, the auditor's walkthrough of the payroll cycle shows that the HR head can add employees to the master file and also approve the monthly salary disbursement. The auditor had planned to rely on payroll controls and reduce substantive testing. What is the most appropriate audit response?

The auditor should conclude the control is poorly designed, so reliance is not justified. The risk assessment is revised upward under SA 315 and SA 330, and more extensive substantive procedures are performed on payroll. A representation letter cannot replace evidence, and reducing samples would increase audit risk.

  1. AContinue to rely on controls since the walkthrough was performed
  2. BConclude the control is ineffective in design, revise the risk assessment upward and perform more extensive substantive procedures on payrollCorrect
  3. CRely on controls only if the HR head signs a management representation letter
  4. DReduce the audit sample size as the controls are centralised in one person

Explanation

A control that is poorly designed cannot be relied upon, so a walkthrough that reveals the weakness means the planned control reliance is unjustified. Under SA 315 and SA 330 the auditor revises the assessment and increases substantive testing. A representation letter is not a substitute for audit evidence, and a smaller sample would be wrong.

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