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

While testing controls at Godavari Foods Ltd, the auditor finds that the purchase approval control operated effectively in the first nine months, but the control owner left in January and, since then, purchases above the limit have been approved without review. The auditor had planned to rely on this control for the entire year. What is the most appropriate response under SA 330?

The auditor cannot rely on the purchase approval control for the period after it lapsed. Under SA 330, the auditor should perform substantive procedures, or other appropriate tests, covering the remaining period, and revise the planned approach, rather than extrapolating the earlier effective operation to the whole year.

  1. ARely on the nine-month test results for the full year because the control was effective for most of the period
  2. BConclude that the financial statements are materially misstated and issue an adverse opinion immediately
  3. CTest the control for the remaining period or perform substantive procedures covering that period, since reliance cannot be placed on the failed control for itCorrect
  4. DIgnore the matter as controls need only be tested at one point in time

Explanation

Reliance on controls requires them to operate effectively throughout the period of intended reliance. Since the control lapsed from January, the auditor cannot rely on it for the last quarter and should revise the nature, timing and extent of procedures by performing substantive procedures for that period. Extrapolating nine months' results (option 1) ignores the known deviation, and an immediate adverse opinion is premature.

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