CA Intermediate · Auditing and Ethics · Audit Report
While reporting on the standalone financial statements of Bharat Cables Ltd under section 143(3) of the Companies Act, 2013, the auditor finds the company's internal financial controls over financial reporting were operating effectively in design but a material weakness exists in the operating effectiveness of the receipts process. What should the auditor do regarding reporting on internal financial controls?
The auditor must report on whether the company has adequate internal financial controls with reference to financial statements and whether they operate effectively. Because a material weakness exists in operating effectiveness, the IFC report should carry a modified conclusion, not be omitted or limited to a private communication.
- AOmit any reporting on internal financial controls since it is management's responsibility
- BReport on the adequacy and operating effectiveness of the internal financial controls with reference to financial statements, and include the material weakness with a modified conclusion in the report on IFCCorrect
- CReport the weakness only to the Audit Committee and not in the audit report
- DInclude the weakness only as a Key Audit Matter without any opinion on IFC
Explanation
Under the Companies Act, 2013, the auditor's report must state whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness. A material weakness leads to a modified conclusion in that reporting. Reporting only to the Audit Committee or as a KAM does not satisfy the statutory requirement, and the matter cannot be left to management.
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