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

While auditing Kaveri Textiles Ltd, the auditor notes that the same employee, Mr. Iyer, raises purchase orders, receives goods at the warehouse and also approves supplier payments. Which weakness in internal control does this situation most directly indicate?

The situation shows an absence of segregation of duties. One employee orders, receives and pays for goods, so no independent person checks the work. This raises the risk of misappropriation and undetected errors, and the auditor should treat it as a control deficiency affecting risk assessment.

  1. AAbsence of segregation of dutiesCorrect
  2. BLack of physical safeguarding of assets only
  3. CExcessive use of authorisation limits
  4. DInadequate budgetary control

Explanation

Authorisation, custody and recording or execution of a transaction should be handled by different people. When one person handles ordering, receiving and paying, errors or fraud can go undetected. The other options do not describe this combination of incompatible duties.

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