ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reports to those charged with governance and management
Orlen Co's auditor identifies three deficiencies: weak access controls over the payroll system, no independent review of bank reconciliations, and inconsistent authorisation of credit notes. Individually each is minor, but together they create a reasonable possibility of a material misstatement in revenue and cash that is not prevented or corrected on a timely basis. Management argues that since no misstatement has been found, there is no significant deficiency. What is the correct auditor response?
The auditor should evaluate the three deficiencies in combination and may conclude they are a significant deficiency, because ISA 265 depends on the likelihood and potential magnitude of misstatement, not on one having actually occurred. If so, they are communicated in writing to those charged with governance. The opinion is not automatically modified.
- ATreat the combination as a potential significant deficiency, because ISA 265 considers whether the deficiencies in combination are important enough to merit the attention of those charged with governance, regardless of whether a misstatement has occurredCorrect
- BAccept management's view, because a significant deficiency exists only if a misstatement has actually occurred
- CReport each as a separate matter to management only, because aggregation is not permitted
- DResolve the issue by modifying the audit opinion on the financial statements
Explanation
ISA 265 explains that whether a deficiency is significant depends on the likelihood of a misstatement and its potential magnitude, not on whether a misstatement has actually occurred. The auditor considers deficiencies in combination where they relate to the same account balance, disclosure or control component. Control deficiencies alone do not require a modified opinion unless misstatements remain uncorrected.
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