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

While auditing Sundaram Textiles Ltd, the auditor notes that the company's accounts staff who prepare vendor payment vouchers can also add new vendors to the master file and release payments through net banking. Which internal control weakness does this chiefly represent, and what is the appropriate audit implication?

The weakness is lack of segregation of duties. One person can create vendors, prepare vouchers and release payments, enabling misappropriation. The auditor should assess control risk higher and extend substantive procedures on payments, rather than rely on controls or ignore the issue.

  1. ALack of segregation of duties, which increases the risk of misappropriation and requires the auditor to reassess control risk and extend substantive testing of paymentsCorrect
  2. BLack of authorisation limits, which has no bearing on the risk of material misstatement and needs no change to the audit approach
  3. CAbsence of physical safeguards over assets, which affects only the audit of inventory
  4. DWeak information processing controls, which allows the auditor to rely fully on the system since it is automated

Explanation

One person can create a vendor, prepare a voucher and release payment, so the custody, recording and authorisation functions are not separated. This raises fraud and error risk, so the auditor assesses control risk as higher and performs more substantive procedures on payments. The other options misidentify the weakness or wrongly say no response is needed.

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