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

While auditing Kaveri Textiles Ltd, CA Mehra finds that the company has no formal process for identifying business risks, although a company of its size and complexity would ordinarily be expected to have one. Under SA 265, how should the auditor treat this observation?

The absence of an entity risk assessment process, where one would ordinarily be expected, is an indicator of a significant deficiency in internal control under SA 265. The auditor should therefore communicate it to those charged with governance rather than treat it as a minor point.

  1. AAn indicator of a significant deficiency in internal control, to be communicated to those charged with governanceCorrect
  2. BA matter relevant only to the audit of the secretarial records, not to internal control communication
  3. CA minor observation that is communicated only if management asks for it
  4. DA reason to withdraw from the engagement immediately

Explanation

SA 265 lists the absence of a risk assessment process, where one would ordinarily be expected, as an indicator of a significant deficiency. Such a matter should be communicated to those charged with governance. Treating it as minor is wrong because the standard names it as a significant deficiency indicator. Withdrawal is not required.

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