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

Meera Traders Ltd has no formal documented control procedures for petty cash, and the owner-manager personally approves every payment. The auditor must decide how to respond. Which approach best reflects the audit response?

The auditor should recognise the limited formal controls, assess the risk of material misstatement accordingly, and rely mainly on substantive procedures for petty cash. Owner supervision alone is not proof of effective controls, and management representation is not adequate audit evidence.

  1. AConclude that controls are effective because the owner supervises
  2. BRecognise the limited formal controls, assess the risk of material misstatement accordingly, and adopt a predominantly substantive approach for that areaCorrect
  3. CWithdraw from the engagement automatically
  4. DRely wholly on management representation for petty cash balance

Explanation

Lack of documented controls does not by itself prevent an audit. The auditor assesses risks given the actual control environment and responds with more substantive procedures. Management representation alone is not sufficient evidence, and automatic withdrawal is not required.

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