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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 person, the stores manager, orders materials, receives them at the godown and also maintains the stock register. Which weakness in internal control does this situation mainly indicate, and what is the appropriate audit response?

The situation shows lack of segregation of duties, because one person authorises, holds and records stock. The auditor should assess control risk as higher and increase substantive testing of inventory, rather than relying on controls, ignoring the weakness or withdrawing from the engagement.

  1. ALack of segregation of duties; the auditor should treat control risk as higher and extend substantive procedures on inventoryCorrect
  2. BExcess of documentation; the auditor should reduce substantive procedures on inventory
  3. CWeak tone at the top; the auditor should withdraw from the engagement immediately
  4. DInherent limitation of internal control; the auditor should ignore it as it is unavoidable

Explanation

Combining authorisation, custody and record-keeping in one person is a failure of segregation of duties. This raises the assessed risk of material misstatement relating to inventory, so the auditor performs more extensive substantive procedures. Withdrawal is not required merely because of such a weakness, and it cannot be ignored as an inherent limitation.

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