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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reports to those charged with governance and management

While auditing Verano Foods, the auditor finds that a clerk can both raise supplier payments and approve them, though a monthly director review of payments has so far detected no errors, and no fraud has been identified. Which approach to evaluating whether this is a significant deficiency is consistent with ISA 265?

The auditor judges significance by the likelihood and potential magnitude of misstatement and by any compensating controls such as the director's review. A deficiency can be significant even if no misstatement has yet occurred, so neither actual error nor discovered fraud is required.

  1. AIt is not significant because no misstatement has actually occurred
  2. BIt is significant only if the auditor has already found a fraud
  3. CThe auditor considers the likelihood and potential magnitude of misstatement and any compensating controls, so absence of actual error does not rule out significanceCorrect
  4. DIt is automatically a significant deficiency because segregation of duties is absent

Explanation

ISA 265 says a deficiency may be significant whether or not misstatements have actually occurred; the auditor considers likelihood and magnitude of potential misstatement, and compensating controls. Option automatic significance ignores that judgement, and the others wrongly require actual error or fraud.

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