CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control
Rao & Associates audit Western Cement Ltd, a company with turnover above the prescribed limit. Section 143(3)(i) of the Companies Act, 2013 requires the auditor's report to state whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness. The auditor finds the company has no documented risk assessment process, but controls over financial reporting were found operating effectively in all tested areas. What is the most appropriate view?
The auditor must assess whether the missing risk assessment process is a material weakness in the design of internal financial controls. If it is, the IFC report should be modified, even though tested controls operated effectively. Adequacy of design and operating effectiveness are both reported on.
- AThe auditor must give a clean IFC opinion because testing found no failures, ignoring the missing risk assessment
- BThe auditor must disclaim the financial statement opinion automatically
- CThe auditor must evaluate whether the absence of a risk assessment process is a material weakness affecting adequacy of the system, and modify the IFC report if it isCorrect
- DThe auditor need not report on IFC because the report is optional for all companies
Explanation
The IFC report covers both design adequacy and operating effectiveness. A missing risk assessment process is a design gap, so even if tested controls operate well, the auditor must judge whether it is a material weakness and modify the IFC report if so. A modified IFC report does not automatically mean disclaiming the financial statement opinion, and the report is not optional for applicable companies.
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