CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control
Under the Companies Act, 2013, the auditor of Himalaya Foods Ltd, an unlisted public company meeting the prescribed thresholds, is reporting under section 143(3)(i). The company has a sound system of internal financial controls over financial reporting designed by management, but the auditor found that a key reconciliation control operated effectively only in nine of twelve months, and the failure was not detected by the company's monitoring. Which is the most appropriate approach to the auditor's report on internal financial controls?
The auditor must evaluate whether the lapse is a material weakness after considering compensating controls. If it is, the opinion on internal financial controls over financial reporting should be modified, because section 143(3)(i) covers both adequacy and operating effectiveness, not design alone.
- AIgnore the lapse because the system is designed well and design alone determines the opinion
- BEvaluate whether the deficiency is a material weakness, considering compensating controls, and if it is, express a modified opinion on the adequacy and operating effectiveness of internal financial controls over financial reportingCorrect
- CReport the lapse only in the management letter since section 143(3)(i) concerns design only
- DWithdraw from the engagement because controls were not effective throughout the year
Explanation
Section 143(3)(i) requires reporting on whether the company has adequate internal financial controls with respect to financial reporting and their operating effectiveness. A control that failed for three months and went undetected must be evaluated for severity, including compensating controls. If it is a material weakness, the opinion on IFC is modified. Design alone is not enough, and withdrawal is not required.
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