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

While auditing Kaveri Textiles Ltd, the auditor notes that the company has no process at all for identifying and assessing business risks, although a company of its size and complexity would ordinarily have one. How should the auditor treat this observation under SA 265?

The auditor should treat the absence of an expected entity risk assessment process as an indicator of a significant deficiency in internal control. SA 265 lists this as such an indicator, so it should be evaluated and communicated in writing to those charged with governance.

  1. AAs an indicator of a significant deficiency in internal control, to be communicated in writing to those charged with governanceCorrect
  2. BAs a matter relevant only to management, with no need to evaluate it as a deficiency
  3. CAs a reason to withdraw from the engagement immediately
  4. DAs a matter to be reported only if the auditor finds a material misstatement

Explanation

SA 265 lists the absence of a risk assessment process, where one would ordinarily be expected, as an indicator of a significant deficiency. Significant deficiencies are communicated in writing to those charged with governance. Option D is wrong because the indicator does not depend on a misstatement being found.

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