A5 Communications Flashcards
What is a control deficiency?
A control deficiency exists when the design or operations of a control does not allow management or employees, in the normal course of performing their assigned function, to prevent or detect/correct misstatements on a timely basis.
What is a significant deficiency (SD)
A SD is a deficiency, or a combination of deficiencies, in I/C over financial reporting that is less severe than a MW, yet important enough to merit the attention by those charged with governance (responsible for oversight of the companies Financial Reporting)
What is a Material Weakness?
MW is a deficiency, or a combination of deficiencies, in I/C over the FR, such that there is a reasonable possibility that a MM of the company’s annual or interim F/S will not be prevented or detected/corrected on a timely basis.
What are the auditor’s 3 responsibilities with respect to control deficiencies identified during an audit of a non-issuer?
- Auditor has a responsibility to evaluate control deficiencies identified during the audit to determine whether they represent SD or MW.
- SD and MW should be communicated in writing to management and those charged with governance within 60 days of the report release date.
- The communication with management and those charged with governance should be restricted use.
What is an integrated audit? When is an integrated audit required?
An integrated audit requires the auditor to audit both the FS and the IC over FR. The two audits must be performed together, and two opinions (one of the FS and one of the IC) will be rendered. An integrated audit is required:
- For all audits of issuers
- When an auditor is engaged to examine the IC of a non issuer.
Describe the top-down approach used to select controls to test for issuer/non-issuer clients.
The top-down approach includes the following chronological levels:
- FS level = The auditor evaluates overall risks
- Entity level = The auditor identifies and tests controls pertaining to
A. The control environment
B. Management Override
C. Monitoring the results of operations and other controls
D. Period-End FR
E Centralized Operations - Accounts, Disclosures, and Assertions Level = The Auditor evaluates qualitative and quantitative risk factors to identify SD, disclosures, and assertions for which there is a reasonable possibility of MM. Once identified the controls are tested.
what is the accountants Responsibility with respect to CD identified during an engagement to examine the IC of a non-issuer?
SD and MW should be communicated in writing to management and those charged with governance by the report release date.
Control Deficiencies that are not SD or MW should be communicated in writing to management within 60 days of the report release date.
MW results in a adverse opinion.
How are CD, SD, and MW communicated by the A to the issuer in an integrated audit.
- All internal CD over FR that are id during the audit should be communicated to management in writing. The AR should be informed when the communication is made.
- SD id during the audit should be communicated in writing to the AC
- MW id during the audit should be comm in writing to both mngmnt and the AC prior to the issuance of the Auditor’s report on IC over FR.
How does the extent of testing of IC differ between the FS Audit and an examination of IC for non-issuers.
The extent of testing IC for the FSA is more limited than in an IC examination.
When rendering an opinion on IC for an examination of IC, the auditor should obtain evidence regarding the effectiveness of selected controls over all relevant assertions. This level of testing is not required for the FSA.
List the items that an auditor is required to comm to those charged with governance:
Note: Comm can be oral or written, but must be documented in the Audit Documentation (WP)
- A responsibility uder GAAS
- The planned scope and timing of the Audit
- Significant Audit Findings Including :
A. Significant accounting policies
B. M judgements and Accounting estimates
C. The A’s Judgement about the quality of the entity’s acc’tg principles
D. Difficulties encountered in performing the audit; disagreement with M
E. Audit adjustments
F. Consultation (by M) with other accountants
G. Other items required by AICPA standards or the SOX
What are the function of the Audit Committee (AC)?
Note AC had additional responsibilities under SOX
- Selects and appoints the indep A and sets the audit fees
- Reviews the nature and details of the audit engagement
- Reviews the quality of the auditor’s work
- Reviews the scope of the audit.
- Determines that any recommendations made by the auditor are given proper attention.
- Maintains lines of communication between the auditor and the BOD
- Helps solve and disagreements related to the acctg treatment of material items in the FS.
- Evaluates the IC of the company with the help of the indep A
- Makes reports to the BOD and the stockholders when necessary
- Assures that the auditor is indep of the company
What are the 3 primary purposes for obtaining written representation from M?
- Confirm representations explicity or implicity given to the A
- To indicate and doc the cont. appropriateness of such representations
- To Reduce the possibility of misunderstanding concerning matters that are the subject of representation
What general types of items are included in a MRL, and who should sign it?
MRL general includes information related to:
- the FS
- the completeness of info
- Fraud
- Related Party Trans
- Recognition, measurement, and disclosures,
- Subsequent events
- Issues specific to a particular entity
MRL should be signed by the CEO, CFO, and other members of M who are responsible for knowledgeable about the items contained in the letter.
What standards are reference in the auditor’s report that provides an opinion on the operating effectiveness of internal control for:
- Issuers?
- Nonissuers?
- Issuers must reference that the audit was conducted in accordance with the standards of PCAOB
- nonissuers must reference that the examination was conducted in accordance with attestation standards established by the AICPA
What is included in the inherent limitation paragraph in the auditor’s report that provides an opinion on the operating effectiveness of internal control?
BC of its inherent limitation, IC over financial reporting may not prevent or detect and correct misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate bc of changes in conditions or bc of the degree of compliance with the policies or procedures may deteriorate.
