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CA Final · Financial Reporting · Accounting and Technology

Kaveri Textiles Ltd. runs its general ledger on a cloud-based ERP hosted by an external provider. A new version of the ERP is released, and the management wants to know the key risk to the integrity of financial reporting when the provider alone controls the hosting environment. Which of the following is the most direct reporting-related risk arising from this arrangement?

The most direct risk is dependence on the cloud provider's controls over data security, availability and processing integrity, which the company cannot directly observe. The entity stays responsible for its financial reporting, so it must obtain assurance over those outsourced controls rather than assume they are effective.

  1. AReliance on the provider's controls over data security, availability and processing integrity, which the company cannot directly observeCorrect
  2. BAutomatic elimination of the need for any internal controls over financial reporting
  3. CGuaranteed accuracy of all journal entries because the software is vendor-certified
  4. DLoss of the company's obligation to maintain books of account in electronic form

Explanation

When hosting is outsourced, the entity depends on the service provider's controls over security, availability and processing integrity. The entity remains responsible for its financial reporting and cannot assume that vendor certification makes entries accurate. Hence the dependence on controls it cannot directly observe is the main risk.

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