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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

While auditing Kaveri Foods Ltd, CA Rohan finds that the company's sales ledger is maintained by one clerk who also receives cash from customers. Rohan decides to extend direct confirmation of debtors balances. Which concept does this response most directly address?

The response addresses higher control risk caused by weak internal control. Because one clerk records sales and handles cash, the auditor cannot rely on controls and lowers detection risk by performing more substantive procedures such as debtor confirmations. Detection risk can be reduced but never eliminated entirely.

  1. AInherent limitation arising from the cost of the audit
  2. BRisk that arises because of weak internal control, which increases control risk and calls for more substantive evidenceCorrect
  3. CDetection risk being reduced to zero by confirmations
  4. DReduction of audit risk by shifting responsibility to management

Explanation

Combining recording and cash handling is a weakness in internal control, so control risk is assessed higher. To keep audit risk acceptably low, the auditor lowers detection risk by performing more substantive procedures such as confirmations. Option C is wrong because detection risk can be reduced but never eliminated.

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