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

Sundaram Pharma Ltd has a policy that the person who prepares bank reconciliations also has authority to approve payments and sign cheques. The auditor, CA Meera, notes this during understanding of internal control. Which is the most appropriate audit response?

The auditor should treat the overlap of reconciliation, approval and cheque signing as a segregation of duties deficiency, assess how it affects the risk of material misstatement, and respond with more extensive substantive procedures on cash and payments. It does not automatically mean misstatement exists or that the auditor must withdraw.

  1. ATreat it as a deficiency in segregation of duties, evaluate its effect on the risk of material misstatement, and consider more substantive procedures on cash and paymentsCorrect
  2. BIgnore it because segregation of duties is only a concern for listed companies
  3. CConclude that the financial statements are materially misstated
  4. DWithdraw from the engagement immediately

Explanation

Combining reconciliation, authorisation and payment functions weakens control and raises the risk of misappropriation. The auditor evaluates the deficiency, assesses the risk, and designs more extensive substantive procedures. It is not limited to listed companies, and a deficiency alone does not prove material misstatement or require resignation.

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