(A5, S2) Internal Control Communications

Question 1

What factors should an auditor consider when making a judgment about whether a control deficiency is a significant deficiency?

Answer 1

1. The likelihood that a control will fail to prevent or detect a misstatement.
2. The magnitude of the misstatement that could result from the deficiency.

Question 2

Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded.
True or False?

Answer 2

True.

Question 3

What types of matters considered to be a significant deficiency in internal control would an auditor consider communicating to management and those charged with governance?

Answer 3

Evidence of a lack of objectivity by those responsible for accounting decisions.
This is because it can result in financial statements that are biased rather than presented fairly.

Question 4

Any report issued on significant deficiencies or material weaknesses should include what 3 points?

Answer 4

1. indicate that the purpose of the audit was to report on the financial statements and not to provide an opinion on internal control
2. include the definition of a material weakness and, if applicable, significant deficiency
3. include a restriction on the use of the report

Question 5

In reporting on a nonissuer’s internal control over financial reporting, and auditor should include a paragraph that describes the:

Answer 5

Inherent limitations of any internal control, errors or fraud may occur and not be detected.
(Only when reporting on internal control, not when part of audit on financial statements).

Question 6

What conditions are necessary for an auditor to accept an engagement to audit and report on a nonissuer’s internal control over financial reporting?

Answer 6

• Management must present its written assessment about the effectiveness of internal control
• Not necessary for previous engagement experience to complete the audit.
  The report is appropriate for general distribution.

Question 7

When does a control deficiency exist?

Answer 7

When deficiencies are not detected within a timely period by employees in the normal course of performing their assigned functions.

Question 8

What is a material weakness?

Answer 8

A deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected/corrected.

Question 9

It is management’s responsibility to assess and report on internal control, but the auditor is also required to assess and report on internal control. (For issuers)
True or False?

Answer 9

True.

Question 10

What will result in an adverse opinion of the effectiveness of the internal control?

Answer 10

Material weaknesses but not significant deficiencies.

Question 11

The auditor is required to communicate significant deficiencies each year, regardless of whether the deficiency has a material effect on the auditor’s assessment of control risk or the deficiency is considered a material weakness.
True or False?

Answer 11

True.

Question 12

What action should an auditor take in response to discovering a deviation from the prescribed control procedure?

Answer 12

Make inquiries to understand the potential consequences of the deviation.

Question 13

The auditor is required to obtain an understanding of each of the five components of internal control, including the control environment and the (accounting) information system.
True or False?

Answer 13

True.

Question 14

An engagement to audit the internal control of a nonissuer will generally:

Answer 14

Be more extensive in scope than the assessment of control risk made during a financial statement audit.

Question 15

What are some of the roles of risk assessment in an integrated audit of a nonissuer?

Answer 15

• Selecting controls to test
• Determining significant accounts and relevant assertions
• Determining evidence necessary to conclude on the effectiveness of a given control

Question 16

When PLANNING an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, what factors would an auditor consider?

Answer 16

• The extent of recent changes in the entity and its operations
• The type of available evidential matter pertaining to the effectiveness of the entity’s internal control
• Preliminary judgments about the effectiveness of internal control

Question 17

Performing walkthroughs are frequently the most effective way of understanding the sources of potential misstatements. A walkthrough involves following a transaction from origination through the entity’s processes, including information systems, until it is reflected in the entity’s financial records, using the same documents and IT that entity personnel use.
True or False?

Answer 17

True.

Question 18

An auditor that is testing controls at a company with multiple business units should test controls over specific risks at business units that are material to the company’s consolidated financial statements.
True or False?

Answer 18

True.

Question 19

Which best describes the framework to be used when evaluating whether a deficiency in internal control is a significant deficiency or a material weakness?

Answer 19

A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.