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

The auditor of Ganga Steels Ltd identifies a significant risk relating to revenue recognition on bill-and-hold sales near year end. Under SA 315 (Revised) and SA 330, which response is most appropriate?

The auditor should understand the design and implementation of relevant controls and perform substantive procedures specifically responsive to the significant risk, such as reviewing contracts and delivery terms and testing cut-off. Reliance on controls alone or on analytical procedures alone is not adequate for significant risks.

  1. ARely solely on tests of operating effectiveness of general IT controls and perform no substantive procedures
  2. BObtain evidence of the design and implementation of relevant controls, and perform substantive procedures specifically responsive to the risk, such as examining contracts and delivery terms and testing cut-offCorrect
  3. CTreat the risk as a normal risk and apply only substantive analytical procedures
  4. DCommunicate the risk to those charged with governance and avoid performing procedures until they respond

Explanation

For significant risks, the auditor must understand the relevant controls and perform substantive procedures that are specifically responsive, not just analytical procedures alone. Contract terms, delivery evidence and cut-off testing address bill-and-hold risk directly. Relying only on controls or merely communicating does not meet the requirement.

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