Spare Parts Limited received an input from internal auditors that internal controls implemented by the company appears to be reasonable but not so…
CA Intermediate · Auditing and Ethics · PYQS · January 2025
Spare Parts Limited received an input from internal auditors that internal controls implemented by the company appears to be reasonable but not so strong that any fraudulent activity can be prevented or timely detected by such controls. Accordingly a qualified person should head the internal controls department. CA Raj has been appointed as an Internal Control Head of the company. His scope of work includes development of internal controls in various departments/areas of the company. On his joining, he studied the various verticals and after identifying the important areas (prone to fraud) implemented strong controls in those areas. In his meeting with senior management and statutory auditors, he assured that satisfactory control environment exists and fraud cannot happen. Whether existence of a satisfactory control environment can be considered as an absolute deterrent to fraud ? (4 Marks)
Suggested Answer and Working Notes:
Existence of a satisfactory control environment is not an absolute deterrent to fraud. The existence of a satisfactory control environment can be a positive factor when the auditor assesses the risks of material misstatement.However, although it may help reduce the risk of fraud, a satisfactory control environment is not an absolute deterrent to fraud.Conversely, deficiencies in the control environment may undermine the effectiveness of controls, in particular in relation to fraud. For example, management's failure to commit sufficient resources to address IT security risks may adversely affect internal control by allowing improper changes to be made to computer programs or to data, or unauthorised transactions to be processed.The control environment in itself does not prevent, or detect and correct, a material misstatement. It may, however, influence the auditor's evaluation of the effectiveness of other controls.For example, the monitoring of controls and the operation of specific control activities and thereby, the auditor's assessment of the risks of material misstatement.
Topics: Risk Assessment and Internal Control
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