On reviewing internal control over accounting for sales as part of statutory audit of A Ltd, auditor finds certain deficiencies in segregation of…

CA Intermediate · Auditing and Ethics · MTP · May 2024
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?

Suggested Answer and Working Notes:

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. 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 following the standard instructions/ procedures specified in relation to various aspects of sales as stipulated by the management. It should explain that such a significant deficiency can lead to misstatement of revenue and trade receivables 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.

Topics: Completion and Review

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