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ACCA Strategic Professional · Strategic Business Leader · Management and internal control systems

Tessaro Group's audit committee receives a report from the external auditor identifying a significant deficiency: sales staff can both raise customer credit notes and approve them. Management says the cost of fixing it is high and the risk is low. Which response by the audit committee best reflects its oversight role?

The committee should challenge management, evaluate the fraud and misstatement risk of the segregation failure, and require remediation or compensating controls, with internal audit following up. It should not accept management's view uncritically, nor ask the external auditor to fix controls, which would impair independence.

  1. AChallenge management, assess the risk of fraud and misstatement, and require a remediation plan or compensating controls with follow-up by internal auditCorrect
  2. BAccept management's view since executives know the business best
  3. CInstruct the external auditor to implement the segregation of duties
  4. DRemove the deficiency from the minutes to avoid alarming investors

Explanation

The committee must independently evaluate the risk, not defer to management. Segregation of duties failure creates fraud risk, so remediation or compensating controls with monitoring is appropriate. The external auditor must not implement controls, as that would be a self-review threat, and suppressing the matter breaches governance duties.

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