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

While auditing Bharat Components Ltd, the auditor identifies that the company's year-end inventory cut-off was wrongly processed. The auditor's procedures detected a material misstatement that the company's controls neither prevented nor detected and corrected. How should this be viewed under SA 265?

A misstatement found by the auditor's procedures that the entity's internal control did not prevent, or detect and correct, is an indicator of a significant deficiency under SA 265. The fact that the auditor found it does not cure the control failure.

  1. AAs an indicator of a significant deficiency in internal controlCorrect
  2. BAs proof that the financial statements must be qualified irrespective of correction
  3. CAs irrelevant, since the auditor, not the entity, detected it
  4. DAs a deficiency to be communicated only if management agrees it exists

Explanation

SA 265 lists misstatements detected by the auditor's procedures that were not prevented, or detected and corrected, by the entity's internal control as an indicator of a significant deficiency. Detection by the auditor does not remove the control failure. Qualification does not follow automatically.

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