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

Ramesh & Co. is auditing Sundaram Foods Pvt Ltd, which sells through 40 depots. The auditor wants to understand the entity's information system relevant to financial reporting. Which procedure is the most appropriate response under SA 315 (Revised)?

The auditor should perform walkthroughs, tracing selected depot transactions from initiation to recording and reporting. This builds the understanding of the information system required by SA 315 (Revised). Management representations, debtor confirmations or testing all controls do not serve that purpose at the risk assessment stage.

  1. APerform a walkthrough by tracing a few depot sales transactions from initiation through recording in the ledger and reporting in the financial statementsCorrect
  2. BAsk the managing director to confirm in writing that the information system is reliable
  3. CSend external confirmations to all debtors at year-end
  4. DTest the operating effectiveness of every control at all depots before planning

Explanation

Understanding the information system includes how transactions are initiated, recorded, processed and reported. A walkthrough of a few transactions is a standard way to obtain this understanding. Management's written assurance is not a substitute, debtor confirmation is substantive evidence on a balance, and testing every control at all depots is not required at the risk assessment stage.

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