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

Mehta & Co., statutory auditors of Kaveri Foods Ltd, identify a significant risk relating to revenue recognition for year-end export shipments. Under SA 330, which response is most appropriate for this significant risk?

The auditor should perform substantive procedures specifically responsive to the significant risk, such as cut-off testing against shipping documents and tests of details. Analytical procedures alone, inquiry alone or reliance on prior-year control testing do not give enough evidence for a significant risk under SA 330.

  1. ARely solely on tests of the operating effectiveness of controls from the prior year without any further testing
  2. BPerform substantive procedures that are specifically responsive to the risk, such as testing cut-off using shipping documents, and not rely on analytical procedures aloneCorrect
  3. CReduce the sample size because the risk is significant and the client is well known
  4. DPerform only inquiry of the sales manager about the shipments

Explanation

For significant risks, SA 330 requires substantive procedures specifically responsive to the risk; if only substantive procedures are used, they must include tests of details. Prior-year reliance and inquiry alone are not sufficient, and reducing the sample size does the opposite of what the higher risk needs.

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