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CA Ravi Taori
QNO Understanding of Internal Controls Assists Auditor Old Course -- (M21R/SM17/N22E)
ICS.02.50 Bhaskar CNO- SA315-P2.030
Auditor GR and Associates, appointed for audit of PNG Ltd, a manufacturing company engaged in
manufacturing of various food items. While planning an audit, the auditor does not think that it would be
necessary to understand internal controls. Advise the auditor in this regard.
OR
ABC Ltd. has many divisions and branches across the country. They have an internal control system which
is well established maintained by the management on a regular basis. Explain the meaning of internal
control as per SA-315 and also state the benefits of understanding the internal controls of a company.
Answer ➢ Understanding Entity’s Internal Control
The auditor shall obtain an understanding of internal control relevant to the audit. Although most
controls relevant to the audit are likely to relate to financial reporting, not all controls that relate to
financial reporting are relevant to the audit. It is a matter of the auditor’s professional judgment
whether a control, individually or in combination with others, is relevant to the audit.

➢ Benefits of Understanding of Internal Control
An understanding of internal control assists the auditor in:
identifying types of potential misstatements;
identifying factors that affect the risks of material misstatement, and
designing the nature, timing, and extent of further audit procedures. The auditor shall
obtain an understanding of internal control relevant to the audit.

➢ Not all Controls are relevant:
Although most controls relevant to the audit are likely to relate to financial reporting, not all controls
that relate to financial reporting are relevant to the audit. It is a matter of the auditor’s professional
judgment whether a control, individually or in combination with others, is relevant to the audit.
Note: For Definition of Internal Control Refer QNO-ICS.02

Control Environment & Its Old Course -- (M19E/N19R/M20M/N20M/
QNO Elements SM17/M19M/SM20/SM21/N21M/N22E/M23M/M23R)
ICS.03 Bhaskar CNO- "SA315-P2.080/ New Course -- (SM25/J25R)
SA315-P2.100"
The auditor of XYZ Ltd, engaged in FMCG (Fast Moving Consumable Goods) obtains an understanding of
the control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment.
OR
The auditor shall obtain an understanding of the control environment Explain stating what is included in
control environment.
OR
The auditor of FAST CARS Ltd obtains an understanding of the control environment. As part of obtaining
this understanding, the auditor evaluates whether management has created and maintained a culture of
honesty and ethical behaviour and the strengths in the control environment elements collectively provide
an appropriate foundation for the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment.
OR
"The division of internal control into five components provides a useful framework for auditors to consider
how different aspects of an entity's internal control may affect the audit. Mention those components of
internal control."
OR
"The auditor of MARUT Ltd, engaged in manufacturing of Smart Motor Bikes, obtains an understanding
of the control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control.
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