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

Under section 143(3)(i) of the Companies Act, 2013, the auditor's report must state whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness. In the audit of Bharat Foods Ltd, the auditor finds a material weakness in controls over inventory valuation that was not remedied by compensating controls. Which is the most appropriate treatment in the auditor's reporting on internal financial controls?

The auditor should modify the opinion on internal financial controls, typically adverse, and describe the material weakness. The IFC report under the Companies Act is distinct from the financial statement opinion, and a material weakness not offset by compensating controls means controls are not adequate or effective.

  1. AReport an adverse or modified opinion on internal financial controls, describing the material weaknessCorrect
  2. BGive an unmodified opinion because the financial statements are still true and fair
  3. COmit reporting on internal financial controls since it is management's responsibility
  4. DReport the weakness only to the audit committee verbally

Explanation

The IFC report is separate from the opinion on the financial statements. A material weakness without compensating controls means controls are not adequate or not operating effectively, so the IFC opinion is modified, with the weakness described. Management's responsibility does not remove the auditor's reporting duty.

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