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ISA 265 says a deficiency in a control occurs when existing control does NOT prevent, nor detect and correct, MISSTATEMENTS IN FINSTATS, or it is entirely missing.
My query is if control deficiencies ALWAYS lead to MISSTATEMENTS because I am of the opinion that they don’t.
EXAMPLE:
A deficiency in purchases system could be that a company’s order levels did not meet customer demand, which will lead to dissatisfied customers, and possibly lost sales.
How would a deficiency like this lead to a fin-stat MISSTATEMENT?Auditing is all about risk – risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Not all control deficiencies create material misstatements – like you said. However, they will create greater risk that there could be material misstatements.
For your example, the auditors have discovered the company is not ordering enough stock to sell to its customers.
My answer – Sales are likely to suffer if customers can’t purchase goods from this company, and may turn existing customers away. This could create a going concern problem if turnover falls due to this, and the company is not getting enough cash from sales to cover its short-term liabilities. If the company is not a going concern, the financial statements will be materially misstated if prepared as a going concern.
Hope that helps.
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