Page 95 - CA Final PARAM Digital Book.

claims during the year, 5 instances have come to his notice where above delegation of powers has not
been followed and appointments were made by Divisional manager in place of DCC.

In the beginning, the auditor had assessed risks of material misstatement to be low. Describe why above
finding would change auditor’s assessment in relation to above.
Answer Evaluation of internal controls influences auditor’s assessment of risks of material misstatement. Risks of
material misstatement also consists of control risk.

In the given situation of statutory audit of a Divisional office of a public sector insurance company, it is
noticed that procedure relating to delegation of powers has not been followed and surveyor appointments
have been made in violation of laid down procedures. It is a serious violation and shows that controls are
not operating effectively as laid down by company management.

Such deviations from established controls may lead auditor to conclude that control risk needs to be revised.
Revision of control risk assessment is likely to lead to revision in risks of material misstatement. It may also
result in modification of nature, timing and extent of planned substantive procedures.
1. SA 315: Reference to SA 315, its full name & its applicable in the given scenario.
2. Concept: (CNO-MRI.220) Risk response (Point 4 Final Control Risk Assessment is Applicable)

1. Purpose:
• Design and perform further audit procedures to respond to assessed risks.
• Obtain evidence to support the audit opinion.
2. Audit Planning Considerations: (Shortcut AIM at USA)

• Assertions: Address situations where substantive procedures alone are insufficient, e.g.,
highly automated transactions.
• Internal Controls: Determine if testing internal controls can reduce other substantive
procedures.
• Management Override: Address potential management overrides or fraud.
• Unpredictability: Incorporate unpredictability in performed procedures.
• Significant Risks: Address identified significant risks.
• Analytical Procedures: Use substantive analytical procedures to potentially reduce other
procedures.

3. Audit Procedures:
• TOC: Test the effectiveness of internal controls.
• SAP: Include tests of details and analytical procedures.

4. Final Control Risk Assessment:
• Before concluding, confirm the control risk assessment based on substantive procedures and
obtained evidence.
• For deviations from accounting and internal control systems, make inquiries for implications.
• If deviations indicate that the preliminary assessment isn't supported, amend it unless other
control tests support it.
• Modify planned substantive procedures if the control risk assessment needs revision.

3. Case Discussion: Discuss Point 2,3 & 4.
Conclusion: Such deviations from established controls may lead auditor to conclude that control risk
needs to be revised. Revision of control risk assessment is likely to lead to revision in risks of material
misstatement. It may also result in modification of nature, timing and extent of planned substantive
procedures.

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