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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

While auditing Kaveri Textiles Ltd, the auditor identifies that the company's sales invoices are raised by a billing clerk who also has the authority to approve customer credit notes and post receipts in the debtors ledger. Which weakness in internal control does this situation primarily indicate, and what is the appropriate audit response?

The situation shows a lack of segregation of duties, because one clerk handles invoicing, credit notes and receipts. The auditor should assess control risk as higher and extend substantive procedures on sales and debtors, since the weakness allows errors or misappropriation to go undetected.

  1. ALack of segregation of duties; assess the control risk as higher and extend substantive procedures on sales and debtorsCorrect
  2. BExcessive documentation; reduce substantive procedures on sales since controls are over-designed
  3. CLack of physical safeguards over inventory; perform only a stock count at year end
  4. DInadequate budgeting controls; report it as a modification in the audit report without any further procedures

Explanation

One person handling invoicing, credit note approval and receipt posting means incompatible functions are not separated, so errors or fraud could go undetected. The auditor should treat control risk as higher and increase substantive testing of sales, credit notes and debtors. The inventory option is unrelated to the facts, and a report modification is not an automatic response without evaluating the effect.

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