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

While planning the audit of Kaveri Textiles Ltd, the engagement team identifies that the company's revenue recognition is highly complex and involves significant management judgement. The team concludes that this risk requires special audit consideration. Under SA 315, such an identified risk of material misstatement is termed:

The risk is a significant risk. SA 315 defines it as an identified risk of material misstatement that, in the auditor's judgement, requires special audit consideration, and complex, judgemental revenue recognition is a typical example. Detection risk relates to the auditor's own procedures failing, not to the entity's risk.

  1. AA significant riskCorrect
  2. BA inherent limitation of internal control
  3. CA detection risk
  4. DA control risk

Explanation

SA 315 defines a significant risk as an identified risk of material misstatement that, in the auditor's judgement, requires special audit consideration. Complexity and judgement in revenue are typical indicators. Detection risk is the risk that audit procedures will fail to detect a misstatement and is controlled by the auditor, so it is not the identified risk itself.

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