Chapter 7: Auditing Internal Control over Finaical Reporting

what is management’s responsibilities under section 202

Requires management of public companies to report on the effectiveness of internal control over financial reporting (ICFR) at year-end.

list of management responsililities under section 404

1. Accept responsibility for the effectiveness of the entity’s ICFR

2. Evaluate the effectiveness of the entity’s ICFR using suitable control criteria

3. Support the evaluation with sufficient evidence, including documentation

4. Present a written assessment regarding the effectiveness of the entity’s ICFR as of the end of the entity’s most recent fiscal year

The entityʼs independent auditor must audit and report on the _____ of ICFR. The auditor is required to conduct an ________ of the entityʼs ICFR and its financial statements.

1. effectiveness

2. integrated audit

what is ICFR

It’s a process to help make sure financial reports are accurate and follow GAAP

what are the ICFE controls

• Ensure records accurately reflect company transactions and assets

• Ensure transactions are authorized and recorded per GAAP

• Help prevent or quickly detect unauthorized use or loss of assets

what is control deficiency

Exists when a control’s design or operation can’t prevent or detect misstatements in time.

what is significant degiciency

A control deficiency less severe than a material weakness but important enough to require oversight attention.

is a control deficiency a significant deficiency or a material weakness

both

what is a material weakness

A deficiency in ICFR that could likely allow a material misstatement to go undetected or uncorrected on time.

what are the two dimensions of control deficiency

likeihood and magnitude 

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a:

A.Deficiency in design

B.Deficiency in operation

C.Significant deficiency

D.Material weakness

B.Deficiency in operation

what is the 3 primary objectives of internal control

1. reliable financial reporting 

2. efficiciency and effectiveness of operations 

3. compliance with laws and regulations 

auditor or management 

________ must develop sufficient documentation to

support its assessment of the effectiveness of internal

control.

management 

what is a integrated audit

Includes audits of internal control and financial statements, where control testing influences substantive procedures, and their results inform internal control evaluation.

Suppose an entity implements a control whereby its sales manager reviews

and investigates a report listing sales invoices with unusually high or low

gross margins. Would inquiry of the sales manager as to whether he or she

investigates discrepancies be sufficient evidence to ensure that the control

is working effectively?

• this is called an inquiry 

• they could be lying 

• find evidence that can support what they ask 

If a deficiency, or combination of deficiencies, prevents the auditor from

having reasonable assurance that transactions are recorded properly, then

the auditor should treat the deficiency as an indicator of a ___________

material weakness

what is remediation

the process of correcting a material weakness in the ICFR

If a material weakness is corrected before the “as of” date, there must

be sufficient time for both management and the auditor to test the

operating effectiveness of the control – if not, an adverse opinion is still

issued.

what is a unqualified opinion 

the entity’s internal control is designed and operating effectively

what is a adverse opinion

required if a material weakness is identified

what is a disclaimer of opinion

a serious limited scope

In auditing a public company, Natalie, an auditor for N.M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?:

A. An unqualified report

B. An adverse report

C. A disclaimer of opinion

D. An exculpatory opinion

A. An unqualified report