Page 104 - CA Final PARAM Digital Book.

examples of matters to be considered while determining `significant deficiency' in internal control with
reference to relevant SA.
OR
During the course of the audit of Tirthankara Limited, CA. Shreyansh Manager in the audit team identified
that there is significant risk in lease transactions due to complex cross-border sale and lease back
arrangements. This significant risk or risk of material misstatement was not identified in management's
risk assessment process. Upon various inquiries with Management regarding their risk assessment
process, it was identified and concluded by the audit team that the management's risk assessment process
is not effective to identify all the significant risks. CA. Shreyansh decided that this in combination with
other potential deficiencies in internal control constitutes significant deficiencies in internal control and
hence, is required to be communicated to those charged with governance. However, the engagement
partner had a different view regarding the audit of Tirthankara Limited. According to him, the only matter
that is identified and poses significant deficiencies due to their magnitude is only required to be
communicated. Matters of potential misstatements that are not actual misstatements cannot be termed
as significant deficiencies. You are required to guide CA. Shreyansh with respect to examples of matters
that the auditor may consider in determining whether a deficiency or combination of deficiencies in
internal control constitutes a significant deficiency.
Answer Part I -- Relevant Standards & Laws
▪ SA 265, Communicating Deficiencies in Internal Control to Those who Charged with Governance and

Management
Part II -- Requirements of Relevant Standards & Laws
➢ Definition: - Significant Deficiency: - Deficiency or combination of deficiency, as per
auditor’s judgement is important enough to be brought to attention of TCWG
Significant deficiency in internal control means a deficiency or combination of deficiencies in internal
control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention
of those charged with governance.

➢ Only occurrence of material misstatement is not must to decide whether deficiency is
significant deficiency, even if there is likelihood of MMST it will be significant deficiency
The significance of a deficiency or a combination of deficiencies in internal control depends not only
on whether a misstatement has actually occurred, but also on the likelihood that a misstatement
could occur and the potential magnitude of the misstatement. Significant deficiencies may
therefore exist even though the auditor has not identified misstatements during the audit.

Examples of matters which should be considered while deciding significant
deficiency.
(Very Amazing FLOSS)
Volume of activity / Amounts exposed / Frequency of the exceptions Detected &
its Causes / Likelihood of the deficiencies / Other deficiencies interacting /
Susceptibility to loss or fraud of the related asset or liability / Subjectivity and
complexity of determining estimated amounts
Examples of matters that the auditor may consider in determining whether deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:
• The Volume of activity that has occurred or could occur in the account balance or
class of transactions exposed to the deficiency or deficiencies. (Coal is purchased 5
times in a week, wooden blocks are purchased once a week)
• The financial statement Amounts exposed to the deficiencies. (Coal accounts for
80% of fuel while wooden blocks account for 5% of fuel)
• The cause and Frequency of the exceptions detected as a result of the deficiencies
in the controls. (Already 5 instances of fraud detected in coal)
• The Likelihood of the deficiencies (Probability) leading to material misstatements
in the financial statements in the future. (Chances of misstatement is higher in
purchase of coal as compared to wooden blocks)
• The interaction of the deficiency with Other deficiencies in internal control. (There
is fixed policy of coal quality assessment & there is no experienced, knowledgeable
supervisor also)

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