CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control
Under Section 143(3)(i) of the Companies Act, 2013, the auditor of Orchid Pharma Ltd (a listed company) must report on internal financial controls. During the year the company had an IFC weakness: bank reconciliations were not reviewed by a senior official for six months, but a compensating review of daily bank balances by the treasury head operated effectively and no misstatement resulted. Which is the most appropriate evaluation by the auditor?
The auditor should assess whether the compensating treasury review is precise enough to prevent or detect a material misstatement. If it is, the missing bank reconciliation review may not be a material weakness. Automatic adverse reporting or ignoring the gap because no error occurred would both be incorrect.
- AEvaluate whether the compensating control addresses the same risk precisely enough; if it does, the deficiency may not be a material weaknessCorrect
- BTreat it automatically as a material weakness and give an adverse opinion on IFC
- CIgnore it because no misstatement actually occurred
- DReport it only to the audit committee and leave it out of the IFC report
Explanation
The auditor evaluates deficiencies individually and in aggregate, considering compensating controls and whether they operate at a level of precision that would prevent or detect a material misstatement. If the treasury head's review meets this test, the deficiency need not be a material weakness. Automatic adverse reporting ignores compensating controls, and absence of actual misstatement does not remove a deficiency. IFC reporting is part of the audit report, not only a communication to the audit committee.
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