Misstatements and Internal Control Deficiencies M8

Question 1

What are the 4 types of control deficiencies?

Answer 1

Control Deficiency in Design

• Occurs when a necessary control is missing or when an existing control does not achieve the desired objective.
• Report only to management within 60 days non-issuer / 45 days issuer.

Control Deficiency in Operations

• Occurs when a properly designed control does not operate as designed, or is performed by an inappropriate person
• Report only to management within 60 days non-issuer / 45 days issuer.

A Material Weakness is a Deficiency (adverse opinion)

• A combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement will not be prevented, detected, or corrected on a timely basis.
• Report to management and those charged with governance within 60 days non-issuer / 45 days issuer.

A Significant Deficiency

• 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.
• Report to management and those charged with governance within 60 days non-issuer / 45 days issuer.

Question 2

What are the different audit procedures for handling the control deficiencies?

Answer 2

• Control Deficiency are communicated to only management withing 60 days non-issuers and 45 days issuer.
• Significant deficiencies are communicated in writing to both management and those charged with governance withing 60 days non issuer / 45 days issuer
• Matrial weakness are communicated in writing to both management and those charged with governance withing 60 days non issuer / 45 days issuer

Question 3

What are some examples of material weakness in the operation of IC?

Answer 3

• Management override of controls is considered evidence of failure in the operation of internal controls.
• Undue bias or lack of objectivity is considered evidence of failure in the operation of internal controls.
• Misrepresentation by client personnel to the auditor is considered evidence of failure in the operation of internal controls

Question 4

What are some examples of Significant Deficiencies or material weakness in design of Controls?

Answer 4

• An observed deviation rate that exceeds the auditor’s expected rate.
• Inadequate documentation of the components of internal control .
• Lack of appropriate qualifications or training of client personnel.
• Insufficient control consciousness.
• a lack of segregation of duties.

Question 5

What is the Objective of Evaluating Uncorrected Misstatements?

Answer 5

• The auditor should consider the impact of both prior year and current year uncorrected misstatements.
• If a misstatement identified in the current year would have had a material impact on the prior year financial statements, the auditor must determine if the prior year opinion in the auditor’s report needs to be amended. (If it is still happening then it can be pervasive, and the auditor should consider changing its audit opinion).

Question 6

What should a sucessor auditor do if it finds a misstatement in audited financials by the predecessor auditor?

Answer 6

• First, arrange a meeting to discuss the matter.
• Second, confirm that a misstatement exists.
• Third, The Audit Committee will typically be notified.
• Forth, advise the client to restate its financial statements.

Question 7

How does the auditor handle misstatements found?

Answer 7

• If the client agreed to adjust its financial statements, the company should receive an unmodified opinion.
• When control deficiencies are noted, the auditor should
  determine whether the control deficiency, is a significant deficiency, or material weakness.

Question 8

What is evidence of deficiency in the design of controls?

Answer 8

• Insufficient control consciousness

Question 9

What is evidence of failure in the operation of internal controls?

Answer 9

• Misrepresentation by client personnel to the auditor.
• Undue bias or lack of objectivity.
• Management override of controls.