Page 209 - CA Inter Audit PARAM

CA Ravi Taori

QNO— Control Deficiency Identified New Course – (SM25)
265.20 Bhaskar CNO - SA265.040
A Chartered accountant during course of audit of a company finds that cash is not deposited into bank
frequently although concerned staff of company was required to do so. Further, the official responsible
for ensuring performance of above function, has also not paid any attention to it. Discuss what does it
represent from auditor’s perspective.
Answer Deficiency in internal control – exists when:
A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and
correct, misstatements in the financial statements on a timely basis or A control necessary to prevent, or
detect and correct, misstatements in the financial statements on a timely basis is missing.

• Discussion & Conclusion
Cash is not deposited into bank frequently, although, concerned staff of company was required to do so.
Further, the official responsible for ensuring performance of above function, has also not paid any attention
to it. It means that control is not working as planned. It would not be able to prevent misstatement and
very purpose of control is defeated. It represents a “control deficiency”

QNO— Matters Considered for Determining Significant or Other Deficiency New Course – (SM25/S24M)
265.50 Bhaskar CNO - SA265.040
List out some matters that the auditor may consider in determining whether a deficiency or combination
of deficiencies in internal control constitutes a “significant deficiency”.
OR
CA Sumit has been appointed as statutory auditor of Core Limited. List out some matters that he may
consider in determining whether a deficiency or combination of deficiencies in internal control
constitutes a “significant deficiency”.
Answer Significant Deficiency in Internal Control: 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.

Determining Significance of Deficiencies: 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 that the auditor may consider in determining whether a deficiency or combination
of deficiencies in internal control constitutes a significant deficiency:
(Shortcut: VISA Of LEE)
• Volume of Activity in Exposed Accounts: The volume of activity that has occurred or could occur
in the account balance or class of transactions exposed to the deficiency or deficiencies.
• Importance of Controls to Reporting Process: The importance of the controls to the financial
reporting process, for example: General monitoring controls, controls over fraud prevention and
detection, significant accounting policies, related party transactions, transactions outside normal
business, and period-end reporting.
• Susceptibility to Loss or Fraud: The susceptibility to loss or fraud of the related asset or liability.
• Amounts Exposed: The financial statement amounts exposed to the deficiencies.
• Interaction with Other Deficiencies: The interaction of the deficiency with other deficiencies in
internal control.
• Likelihood of Material Misstatements: The likelihood of the deficiencies leading to material
misstatements in the financial statements in the future.
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