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

Meera & Co., chartered accountants, audit Orion Steels Ltd. The auditor assessed the risk of material misstatement in inventory as high at the assertion level, and the company's inventory controls were found weak. The partner proposes to reduce substantive procedures and rely on the existing controls. What is the correct audit response under the Standards on Auditing?

The proposal should be rejected. When assessed risk is high and controls are weak, the auditor cannot rely on controls and must design more extensive substantive procedures responsive to the risk, as SA 330 requires. Merely testing weak controls would not provide sufficient appropriate evidence.

  1. AReject the proposal, because with a high assessed risk and weak controls the auditor should perform more extensive substantive procedures responsive to the riskCorrect
  2. BAccept the proposal, because controls always reduce the need for substantive procedures
  3. CAccept the proposal, because inventory is verified by management at the year end
  4. DReject the proposal, but only perform tests of controls and no substantive procedures

Explanation

Under SA 330, the auditor's further procedures must respond to assessed risks. A high risk with weak controls means controls cannot be relied upon, so the extent of substantive procedures should increase. Relying on weak controls is unjustified, and tests of controls alone would not give evidence since controls are ineffective.

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