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CMA Intermediate · Corporate Accounting and Auditing · Report on Internal Financial Control over Financial Reporting

While testing a control that requires a second official to approve every purchase invoice above ₹50,000, an auditor finds that in a sample of 40 items, 3 invoices lacked approval. Which response is most appropriate?

The auditor should investigate why the three invoices lacked approval and evaluate whether the control operates effectively, extending testing or reporting a deficiency if needed. A 92.5% compliance rate does not prove effectiveness for a control meant to apply to every invoice, and exceptions cannot be ignored.

  1. AIgnore the exceptions because the sample size was small
  2. BConclude the control is effective since 92.5% of items were approved
  3. CInvestigate the nature and cause of the deviations and evaluate whether the control is operating effectively, considering the need for additional testing or a deficiency conclusionCorrect
  4. DReduce the sample to 20 items to save time

Explanation

Deviations from a prescribed control must be investigated for cause and significance. Here 37 of 40 were approved (92.5%), but a rate of acceptance does not by itself prove effectiveness for a control meant to operate every time. Ignoring the exceptions or shrinking the sample is wrong.

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