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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 to identify business risks, although a company of its size and complexity would ordinarily be expected to have one. How should the auditor treat this observation under SA 265?

The absence of an entity risk assessment process, where one would ordinarily be expected for a company of that size and complexity, is an indicator of a significant deficiency in internal control under SA 265. The auditor should evaluate it and communicate it to those charged with governance.

  1. AAs an indicator of a significant deficiency in internal controlCorrect
  2. BAs a matter that is relevant only to the auditor's materiality computation
  3. CAs an indicator that audit evidence from substantive procedures is unreliable
  4. DAs a matter that need not be considered because risk assessment is the auditor's responsibility alone

Explanation

SA 265 lists the absence of a risk assessment process within the entity, where such a process would ordinarily be expected, as an indicator of a significant deficiency. The observation therefore cannot be ignored or reduced to a materiality matter. It should be evaluated and communicated as a significant deficiency.

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