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

The auditor of Himalaya Steels Ltd identifies a significant deficiency in internal control relating to bank reconciliations, which have not been prepared for six months. Under SA 265, to whom and how should this be communicated?

The auditor should communicate the significant deficiency in writing and on a timely basis to those charged with governance, and also inform management at an appropriate level. SA 265 requires this irrespective of whether fraud has occurred, and oral communication to junior staff does not satisfy the requirement.

  1. AOrally to the junior accountant, since only management of the finance department is concerned
  2. BIn writing on a timely basis to those charged with governance, and also to management at an appropriate levelCorrect
  3. COnly in the audit report, as a qualification of opinion on all financial statements
  4. DNo communication is required unless a fraud has actually been detected

Explanation

SA 265 requires the auditor to communicate significant deficiencies in internal control in writing to those charged with governance on a timely basis, and other deficiencies to management at an appropriate level. Oral communication to a junior staff member is insufficient, and fraud need not be established. The audit report is not the vehicle for this communication, though IFCoFR reporting may be affected separately.

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