Internal Control - Required Communications

Question 1

Define “material weakness.”

Answer 1

A deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis

Question 2

Describe the auditor’s requirements for communicating deficiencies in an entity’s internal controls.

Answer 2

1. )The auditor must communicate in writing the significant deficiencies (including material weaknesses) identified in the audit.
2. )The auditor may choose to communicate lesser matters, too as well.

Question 3

Describe the timing of the required communication of significant deficiencies in internal control.

Answer 3

Under AICPA professional standards, written communication is required no later than 60 days after the audit report release date (including matters communicated orally during the audit).

Question 4

Define “significant deficiency.”

Answer 4

A deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance

Question 5

What is meant by the term “deficiency in design”?

Answer 5

There is a deficiency in design when a control necessary to meet the control objective is missing, or when the control objective is not always met, even if the control operates as designed

Question 6

What is meant by the term “deficiency in operation”?

Answer 6

There is a deficiency in operation when a properly designed control does not operate as designed, or when the person performing the control does not have the authority or competence to effectively perform the control.