Page 210 - CA Inter Audit PARAM

CA Ravi Taori
• Complexity of Determining Estimates: The subjectivity and complexity of determining estimated
amounts, such as fair value accounting estimates.

• Exceptions: The cause and frequency of the exceptions detected as a result of the deficiencies in
the controls.

QNO— Communication of Significant Deficiency New Course – (SM25/M24M/S24E)
265.100 Bhaskar CNO - SA265.120
On reviewing internal control over inventories as part of statutory audit of a company, auditor finds that
physical verification is not being conducted at regular intervals as stipulated by the management. The
auditor finds it to be significant deficiency in internal control over inventories.

He points it out to the management in a one-liner as under: -
“Physical verification of inventories is not being conducted at regular intervals as stipulated by
management.”

Is above communication by auditor proper? Ignore statutory reporting requirements, if any in this
regard.
OR
On reviewing internal control over accounting for sales as part of statutory audit of A Ltd, auditor finds
certain deficiencies in segregation of duties, authorization of sales orders, preparation of invoices,
preparation and authorization of debit/credit notes etc. and non-following of standard procedures as
stipulated by the management. The auditor finds these lapses to be significant deficiencies in internal
control over sales.

He points it out to the management in a one-liner as under: -
“Instructions on internal control related to sales are not properly followed by the staff.”
Is above communication by the auditor proper?
OR
CA Vasu was appointed as the statutory auditor of M/s. Pizza Limited for the financial year 2023-24.
While reviewing the internal controls, he observed that the company has entered into many transactions
with firms in which the directors are interested. The company's specified procedure was by-passed in
such transactions. CA Vasu considered it as a significant deficiency in internal control over related party
transactions. He communicated this deficiency to Those Charged With Governance (TCWG) as under,
"Controls over significant transactions with related parties are weak." In view of the above, please
explain:
(i) What is meant by deficiency in internal control?
(ii) As per SA 265, whether the significant deficiency communicated by CA
Vasu to TCWG is appropriate? Explain.
Answer Description and Potential Effects:
While pointing out significant deficiencies in internal control, auditor has not only to communicate
significant deficiencies giving their description but also explain the potential effects and sufficient
information to those charged with governance and management to understand context of communication.

Case Discussion & Analysis:
Therefore, the above communication is not proper. Not only significant deficiency has to be
communicated, it should also be explained to management the potential effects of not carrying out
physical verification of inventories at regular intervals as stipulated by management. It should explain that
such a significant deficiency can lead to misstatement of inventories impacting profits of the company.
Highlighting importance of such a control, it should be stated that responsibility be fixed for concerned
persons for adhering to such an important control.

www.auditguru.in 7.3