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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 of the company prepares purchase orders, receives goods at the warehouse and also approves the supplier invoices for payment. Which is the most appropriate conclusion about the internal control?

The arrangement is a deficiency in segregation of duties. One employee orders, receives and approves payment for goods, so authorisation, custody and recording are not separated. This raises the risk of misappropriation and undetected errors, and the statutory auditor must factor it into the risk assessment.

  1. AThere is a deficiency in segregation of duties, which increases the risk of misappropriation and error in purchasesCorrect
  2. BThe control is strong because one person has complete knowledge of the purchase cycle
  3. CThe control is adequate as long as the supplier invoices are filed in date order
  4. DThe matter is relevant only to the internal auditor and not to the statutory auditor

Explanation

Segregation of duties requires authorisation, custody and recording to be handled by different persons. Here one person performs all three functions in the purchase cycle, so errors or fraud may go undetected. The statutory auditor must consider this in assessing the risk of material misstatement, so the last option is wrong.

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