CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control
While planning the audit of Kaveri Textiles Ltd, the engagement team obtains an understanding of the entity's control environment. The auditor notes that the promoters frequently override approved purchase procedures and the board takes no action. Which is the most appropriate conclusion under SA 315 (Revised)?
A weak control environment, such as tolerated management override, can affect the financial statements pervasively. Under SA 315 (Revised) the auditor treats it as raising the risk of material misstatement at the financial statement level and responds with overall, more substantive procedures rather than relying on controls.
- AThe weakness is only an operational matter and has no effect on risk assessment
- BThe weak control environment may pervade the financial statements and increases the assessed risk of material misstatement at the financial statement levelCorrect
- CThe auditor should disclaim an opinion immediately without further procedures
- DThe auditor should rely more on controls because management override shows controls are active
Explanation
A control environment that tolerates management override is a weakness that affects many assertions, so it raises risk at the financial statement level and calls for a more substantive, overall response. Treating it as merely operational ignores its pervasive effect. A disclaimer is not automatic at the risk assessment stage.
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