Internal Control—Required Communications Flashcards
After testing a client’s internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client’s internal control. Under these circumstances the auditor most likely would
Issue a disclaimer of opinion about the internal control as part of the auditor’s report.
Increase the assessment of control risk and increase the extent of substantive tests.
Issue a qualified opinion of this finding as part of the auditor’s report.
Withdraw from the audit because the internal control is ineffective.
Increase the assessment of control risk and increase the extent of substantive tests.
This answer is correct because such deficiencies suggest the possibility of misstatement, and accordingly suggest the need for an increase in the assessment of control risk, with a corresponding increase in the scope of substantive procedures.
A material weakness involves a reasonable possibility that what size misstatement will not be prevented or detected?
Immaterial.
Material.
More than inconsequential.
Substantial.
Material
This answer is correct because a material amount is necessary under the professional standards definition of a material weakness.
Which of the following statements is correct concerning an auditor’s communication on internal control related matters noted in an audit of a nonpublic company?
The auditor may issue a written report to the audit committee representing that no significant deficiencies were noted during the audit.
Significant deficiencies should not be re-communicated each year if the audit committee has acknowledged its understanding of such deficiencies.
Significant deficiencies may not be communicated in a document that contains suggestions regarding activities that concern other topics such as business strategies or administrative efficiencies.
The auditor may choose to communicate significant control-related matters either during the course of the audit or up to 60 days after the audit report release date.
The auditor may choose to communicate significant control-related matters either during the course of the audit or up to 60 days after the audit report release date.
This answer is correct because the auditor may choose to communicate significant deficiencies during the course of the audit or after the audit is concluded. This decision is influenced by the relative significance of the significant deficiencies and the urgency of corrective follow-up action.
Which of the following are correct concerning the likelihood of loss and the potential amount involved with a material weakness?
Likelihood of loss
Potential amount involved
Probable
More than inconsequential
Probable
Material
Reasonable possibility
More than inconsequential
Reasonable possibility
Material
Reasonable possibility
Material
This answer is correct because the professional standards indicate that a material weakness has more than a reasonable possibility of resulting in a material misstatement.
Which of the following is true regarding significant deficiencies?
Auditors must search for them.
Auditors should communicate them to the audit committee.
They must be included in the financial statements.
They must be disclosed in footnotes.
Auditors should communicate them to the audit committee.
This answer is correct because they should be communicated to the audit committee.
The auditor who becomes aware of a material weakness related to internal control is required to communicate this to the
Management and those charged with governance.
Senior management and the chief financial officer.
Board of directors and internal auditors.
Internal auditors and senior management.
Management and those charged with governance.
This answer is correct because the professional standards require the auditor to communicate to management and those charged with governance material weaknesses that come to his/her attention during the examination of financial statements.
During the audit the independent auditor identified the existence of a significant deficiency in the client’s internal control and communicated this finding in writing to the client’s management and to those charged with governance. The auditor should
Consider the significant deficiency a scope limitation and therefore disclaim an opinion.
Document the matter in the working papers and consider the effects of the condition on the audit.
Suspend all audit activities pending directions from the client’s audit committee.
Withdraw from the engagement.
Document the matter in the working papers and consider the effects of the condition on the audit.
This answer is correct because the auditor considers and documents his/her understanding of internal control to assist in determining the proper nature, timing, and extent of substantive tests.
An auditor’s letter issued on significant deficiencies relating to an entity’s internal control observed during a financial statement audit should
Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses.
Indicate that the significant deficiencies should be disclosed in the annual report to the entity’s shareholders.
Include a paragraph describing management’s assertion concerning the effectiveness of internal control.
Indicate that the audit’s purpose was to report on the financial statements and not to express an opinion on internal control.
Indicate that the audit’s purpose was to report on the financial statements and not to express an opinion on internal control.
The requirement is to identify the statement that should be included in an auditor’s letter on significant deficiencies. Answer (d) is correct because AU-C 265 indicates that such a letter to the audit committee should (1) indicate that the audit’s purpose was to report on the financial statements and not to express an opinion on internal control, (2) include the definition of a significant deficiency, and (3) restrict distribution of the report.
Which of the following representations should not be included in a report on internal control related matters noted in an audit?
Significant deficiencies related to internal control exist.
There are no significant deficiencies in the design or operation of internal control.
Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit.
The auditor’s consideration of internal control would not necessarily disclose all significant deficiencies that exist.
There are no significant deficiencies in the design or operation of internal control.
The requirement is to determine the representation that should not be included in a report on internal control related matters noted in an audit. Answer (b) is correct because the auditors should not issue a report on internal control stating that no significant deficiencies were identified during the audit. Answer (a) is incorrect because significant deficiencies should be disclosed. Answer (c) is incorrect because an auditor may recommend corrective follow-up action. Answer (d) is incorrect because an auditor may disclose the fact that the consideration of internal control would not necessarily disclose all significant deficiencies that exist.
Which of the following statements is correct concerning significant deficiencies noted in an audit?
Significant deficiencies are material weaknesses in the design or operation of specific internal control structure elements.
The auditor is obligated to search for significant deficiencies that could adversely affect the entity’s ability to record and report financial data.
Significant deficiencies should not be recommunicated each year unless management has failed to acknowledge its understanding of such deficiencies.
The auditor should separately identify and communicate significant deficiencies and material weaknesses.
The auditor should separately identify and communicate significant deficiencies and material weaknesses.
Professional standards define “material weaknesses” and “significant deficiencies,” and provide a sample written communication about internal control matters noted in an audit that separately reports material weaknesses and significant deficiencies if both categories of deficiencies have been identified in an audit of an entity’s financial statements.
The auditor is required to communicate each of the following items to those charged with governance except
An overview of the planned scope and timing of the audit.
The auditor’s responsibilities to complete the audit in accordance with generally accepted auditing standards.
All control deficiencies detected during the course of the audit.
Any significant findings from the audit.
All control deficiencies detected during the course of the audit.
CORRECT! AICPA Professional Standards (specifically, Communicating Internal Control Related Matters Identified in an Audit) requires the auditor to communicate to those charged with governance any “significant deficiencies” in internal control identified by the auditor. The auditor is not required to communicate all control deficiencies identified.
Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit committee (or those charged with governance) because they represent
Disclosures of information that significantly contradict the auditor’s going concern assumption.
Material irregularities or illegal acts perpetrated by high-level management.
Significant deficiencies in the design or operation of internal control.
Manipulation or falsification of accounting records or documents from which financial statements are prepared.
Significant deficiencies in the design or operation of internal control.
Significant deficiencies should be reported to the audit committee because they are significant deficiencies in the design or operation of internal control that could adversely affect the entity’s financial reporting process.
A letter issued regarding significant deficiencies relating to an entity’s internal control observed during an audit of financial statements should include a
Restriction on the distribution of the report.
Description of tests performed to search for material weaknesses.
Statement of compliance with applicable laws and regulations.
Paragraph describing management’s evaluation of the effectiveness of the control structure.
Restriction on the distribution of the report.
Letters on significant deficiencies are restricted as to distribution. The letters are intended solely for the use of the audit committee (or those charged with governance), management, and others within the organization.
Which of the following factors should an auditor consider in making a judgment about whether an internal control deficiency is so significant that it is a significant deficiency?
I. Diversity of the entity’s business.
II. Size of the entity’s operations.
I only.
II only.
Both I and II.
Neither I nor II.
Both I and II.
A significant deficiency is a control deficiency in the design or operation of internal control that can adversely affect the entity’s ability to initiate, record, process, and report financial data in the financial statements.
Factors to be considered in evaluating deficiencies include the entity’s size, its complexity, and the nature and diversity of its business activities.
The correct answer is C - both the diversity of the entity’s business and the size of the entity’s operations would be considered.
Which of the following representations should not be included in a report on internal control related matters noted in an audit?
Significant deficiencies related to internal control design exist, but none is deemed to be a material weakness.
There are no significant deficiencies in the design or operation of the internal control structure.
Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit.
The auditor’s consideration of internal control would not necessarily disclose all significant deficiencies that exist.
There are no significant deficiencies in the design or operation of the internal control structure.
An auditor is not allowed to issue a report indicating that no significant deficiencies were found. Such a report might be misinterpreted.
