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CMA Intermediate · Corporate Accounting and Auditing · Audit Risk, Internal Control, Internal Check and Internal Audit

The internal audit function of Narmada Pharma Ltd concentrates only on evaluating the economy, efficiency and effectiveness of plant operations. What does SA 315 indicate about the relevance of this function's work to the financial reporting?

SA 315 indicates that such work may not directly relate to the entity's financial reporting. A function giving assurance on risk management, internal control and governance may play an important monitoring role over financial reporting, but one focused only on operational economy, efficiency and effectiveness may not.

  1. AIts work necessarily forms part of the entity's monitoring of internal control over financial reporting
  2. BIts work may not directly relate to the entity's financial reportingCorrect
  3. CIts work must be disregarded entirely by the statutory auditor in all circumstances
  4. DIts work converts into substantive evidence on balances automatically

Explanation

SA 315 says that where internal audit responsibilities are focused on evaluating the economy, efficiency and effectiveness of operations, the function's work may not directly relate to the entity's financial reporting. By contrast, a function giving assurance on risk management, control and governance may play an important role in monitoring internal control over financial reporting. The statement is permissive, not absolute, so 'must be disregarded' is wrong.

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