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

In the previous year the auditor of Tapi Steels Ltd had communicated a significant deficiency in controls over fixed asset records. This year management has taken no remedial action and no reason is given. How should the auditor view this?

Management's failure to act on a previously communicated significant deficiency is itself an indicator of a significant deficiency. SA 265 lists it as evidence of an ineffective control environment, so the auditor should evaluate it and communicate it again to those charged with governance.

  1. AManagement's failure to implement remedial action on previously communicated significant deficiencies is itself an indicator of a significant deficiency, relating to the control environmentCorrect
  2. BIt is irrelevant because the earlier communication has already discharged the auditor's duty
  3. CIt is relevant only if fixed assets are material in the current year
  4. DIt is a matter solely for the internal auditor

Explanation

SA 265 includes, among evidence of ineffective aspects of the control environment, management's failure to implement appropriate remedial action on significant deficiencies previously communicated. It is therefore an indicator in its own right. Option B is wrong because the prior communication does not remove the need to evaluate persisting failure.

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