Page 77 - CA Inter Audit PARAM

CA Ravi Taori
he had recovered from the said trade receivable. Pinpoint weaknesses in the internal control system which
led to this situation. Comment.
Answer ➢ Weaknesses in the Internal Control System:
Following two essential features of internal control are relevant here-
Breaking the chain of the work in a manner so that no single person can handle a transaction
from the beginning to the end, and
Segregation of accounting and custodial functions.

➢ Weakness in internal control system in the instant case-
The accountant is receiving cash and also passing the entries in the books. The accountant
should not have been allowed to effect recoveries.
It also appears that system for issuing receipts for amount received – whether cash or cheque
is also lacking.
In a small and to some extent medium size organization, the supervision of the owner offsets
the deficiencies in internal control system. But in this case, it appears, that supervision and
personal control is also lacking.

Thus, in the given case, the main weakness of the system is that it is ignoring the basic requirements
of a good internal control system.

QNO Control risk assessment when control deficiencies Old Course -- (M20R/SM20/SM21/M23M)
ICS.43 are identified Bhaskar CNO- SA315-P1.022
"When auditor identifies deficiencies and report on internal controls, he determines the significant financial
statement assertions that are affected by the ineffective controls in order to evaluate the effect on control
risk assessments and strategy for the audit of the financial statements. Explain"
Answer ➢ Control risk assessment when control deficiencies are identified:
When auditor identifies deficiencies and report on internal controls, he determines the significant

financial statement assertions that are affected by the ineffective controls in order to evaluate the
effect on control risk assessments and strategy for the audit of the financial statements.
When control deficiencies are identified and auditor identifies and tests more than one control for
each relevant assertion, he evaluates control risk considering all of the controls he has tested. If
auditor determines that they support a ‘rely on controls’ risk assessment, or if compensating
controls are identified, tested and evaluated to be effective, he may conclude that the ‘rely on
controls’ is still appropriate. Otherwise we change our control risk assessment to ‘not rely on
controls.’
When a deficiency relates to an ineffective control that is the only control identified for an assertion,
he revises risk assessment to ‘not rely on controls’ for associated assertions, as no other controls
have been identified that mitigate the risk related to the assertion. If the deficiency relates to one
WCGW (what can go wrong) out of several WCGW’s, he can ‘rely on controls’ but performs
additional substantive procedures to adequately address the risks related to the deficiency.

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