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

Sundaram & Co., auditors of Anand Foods Ltd, find that the company's purchase process allows the same employee to raise purchase orders, receive goods in the store and approve supplier payments. Which is the most appropriate conclusion and response by the auditor?

The auditor should treat the combination of ordering, receiving and payment approval as a lack of segregation of duties, which is a control deficiency. The auditor assesses its effect on the risk of material misstatement, adjusts procedures, and communicates significant deficiencies to those charged with governance under SA 265.

  1. AThere is a lack of segregation of duties; the auditor should treat it as a control deficiency, assess its effect on risk of material misstatement and communicate it to those charged with governance if significantCorrect
  2. BThere is no issue, because internal control is the sole responsibility of the auditor to design
  3. CThe auditor should withdraw from the engagement immediately since controls are weak
  4. DThe auditor should ignore it, because only controls relating to sales are relevant to the financial statements

Explanation

Authorising, custody and recording functions should be separated. Combining them is a control deficiency that raises the risk of misappropriation. SA 265 requires the auditor to communicate significant deficiencies in writing to those charged with governance. Designing controls is management's job, and withdrawal is not the required response.

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