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CA Final · Advanced Auditing, Assurance and Professional Ethics · Materiality, Risk Assessment and Internal Control

The auditor of Pinnacle Auto Ltd discovers that the finance head concealed an inventory writedown of a small value. The entity's controls did not prevent it. Is this relevant to the auditor's assessment of significant deficiencies under SA 265?

Yes. SA 265 treats identification of management fraud, whether or not material, that the entity's internal control did not prevent as an indicator of ineffective aspects of the control environment and so of a significant deficiency. The small amount does not remove the indicator.

  1. AYes, identification of management fraud, whether or not material, that was not prevented by internal control is an indicator of a significant deficiencyCorrect
  2. BNo, only material fraud is an indicator of a significant deficiency
  3. CNo, only fraud by those charged with governance is an indicator
  4. DYes, but only if the amount exceeds performance materiality

Explanation

SA 265 includes identification of management fraud, whether or not material, that internal control did not prevent as an indicator of a significant deficiency. Materiality does not limit it, so the other options are incorrect.

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