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CS Professional · Compliance Management, Audit and Due Diligence · Audit Principles and Techniques

While auditing Kaveri Textiles Ltd, the audit senior concludes that because the company's internal controls are well designed and consistently operated, control risk is nil and no further assessment of it is needed. Which statement best reflects the position under SA 200?

The conclusion is wrong. Internal control, however well designed and operated, only reduces and cannot eliminate risks of material misstatement because of inherent limitations such as human error, collusion and management override, so some control risk always exists.

  1. AThe conclusion is correct because well-designed controls eliminate the risk of material misstatement
  2. BThe conclusion is incorrect because some control risk will always exist owing to inherent limitations such as human error, collusion and management overrideCorrect
  3. CThe conclusion is correct only if the company is listed
  4. DThe conclusion is incorrect only because control risk is assessed by the management and not the auditor

Explanation

SA 200 states that internal control, however well designed and operated, can only reduce and not eliminate risks of material misstatement. Human errors, collusion and management override mean some control risk always exists. Option A ignores these inherent limitations.

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