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CA Final · Advanced Auditing, Assurance and Professional Ethics · Materiality, Risk Assessment and Internal Control

Rohan & Co, auditors of Sahyadri Pharma Ltd, find that management did not identify the risk of obsolete inventory despite a major product recall, a risk the auditor would expect management's risk assessment process to have identified. What is the most appropriate conclusion?

The failure shows an ineffective entity risk assessment process and is an indicator of a significant deficiency. SA 265 identifies management's failure to spot a risk the auditor would expect the process to identify as such evidence, so the auditor should evaluate and communicate it.

  1. AIt is evidence of an ineffective entity risk assessment process and is an indicator of a significant deficiencyCorrect
  2. BIt is not a deficiency because the auditor, not management, is responsible for identifying risks
  3. CIt is a deficiency only if inventory is audited at year-end
  4. DIt is merely a presentation matter with no bearing on internal control

Explanation

SA 265 treats management's failure to identify a risk of material misstatement that the auditor would expect the process to have identified as evidence of an ineffective risk assessment process. This is an indicator of a significant deficiency. Option B is wrong because management owns the entity's risk assessment process, even though the auditor separately assesses risks.

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