How CA. R, the statutory auditor would react to the findings of internal auditor about the deficiencies in internal control of receivables?

Management failing to remedy known significant deficiencies in internal control on a timely basis is a fraud risk factor for misstatements arising from fraudulent financial reporting. When management does not correct significant deficiencies in internal control on a timely basis, it reflects an attitude, character or set of ethical values that allow them knowingly and intentionally to commit a dishonest act. Failure to rectify known control deficiencies pertaining to reconciliation of receivables has the potential to fraud. Lack of timely reconciliation of receivables may lead to intentional misstatements. CA. R should communicate such material weaknesses to the management or the audit committee through a letter of weakness or management letter. Further, CA. R should ensure the management has taken corrective action for such deficiency. He is also required to comply with the provisions of SA 705 for issuance of audit report, if the deficiency in the internal control persist. Alternative Solution During the course of audit work, the auditor may notice material weaknesses in the internal control system. SA 265 on "Communicating Deficiencies in Internal Control to Those Charged with Governance and Management" deals with the auditor's responsibility to communicate appropriately to those charged with governance and management deficiencies in internal control that the auditor has identified in an audit of financial statements. The auditor shall determine whether, on the basis of the audit work performed, the auditor has identified one or more deficiencies in internal control. If the auditor has identified one or more deficiencies in internal control, the auditor shall determine, on the basis of the audit work performed, whether, individually or in combination, they constitute significant deficiencies. However, responsibility of auditor will not be reduced by writing a letter to the management about the weaknesses in the system. Further, the auditor is not absolved from his duty to report the shortcomings in the accounts by way of qualification where the defects have not been corrected to the auditor's satisfaction weighing the materiality of weaknesses and their impact, if considered necessary. In the given situation, internal auditor informed about the deficiencies in internal control of the company to CA. R, statutory auditor, that receivables were not reconciled at regular intervals (i.e.) quarterly. CA. R should communicate such material weaknesses to the management or the audit committee through a letter of weakness or management letter. Further, CA. R should ensure the management has taken corrective action for such deficiency. He is also required to comply with the provisions of SA 705 for issuance of audit report, if the deficiency in the internal control persist.