Communication with mgmt & those charged with governance Flashcards
(4 cards)
Which of the following statements is correct concerning significant deficiencies in an audit?
A. An auditor is required to search for significant deficiencies during an audit.
B. An auditor should consider all significant deficiencies to be material weaknesses.
C. An auditor may communicate significant deficiencies during an audit or after the audit’s completion.
D. An auditor may report that no significant deficiencies were noted during an audit.
C. An auditor may communicate significant deficiencies during an audit or after the audit’s completion.
Early in an audit, an auditor is required to understand and document the client’s internal control structure (I/C). The auditor will perform tests to determine the effectiveness of those controls to be relied on to reduce the risk of material misstatement (RMM).
These tests may uncover I/C deficiencies that may be classified as either material weaknesses or significant deficiencies (Choice B).
Material weaknesses exist when it is probable that material misstatements would occur because it is reasonably possible that I/C would not prevent, detect, or correct misstatements in a timely manner.
Significant deficiencies are important I/C deficiencies but are less severe than material weaknesses.
The auditor is not required to search for significant deficiencies during an audit (Choice A). However, if internal control testing uncovers such deficiencies, they must be documented and communicated in writing to management and those charged with governance, either during the audit or within 60 days of the report release date.
(Choice D) GAAS specifically states that “the auditor should not issue a written communication stating that no significant deficiencies were identified during the audit.” Communicating such could be misunderstood or misused.
Things to remember:
An auditor is not required to search for significant deficiencies or material weaknesses. However, when internal control tests uncover such deficiencies, the auditor must document them and communicate them in writing to management and those charged with governance during the audit or within 60 days of the report release date.
When communicating internal control matters noted in a nonissuer financial statement audit, an auditor’s report should indicate that
A. Errors or irregularities may occur and not be detected because there are inherent limitations in any internal control structure.
B. The issuance of an unqualified opinion on the financial statements may be dependent on corrective follow-up action.
C. The deficiencies noted were not detected within a timely manner by employees in the normal course of performing their assigned functions.
D. The purpose of the audit was to report on the financial statements and not to provide assurance on the internal control structure.
D. The purpose of the audit was to report on the financial statements and not to provide assurance on the internal control structure.
The purpose of a nonissuer financial statement audit (ie, financial audit) is to express an opinion on the fairness of the entity’s financial statements, not on its internal control over financial reporting (ICFR). Even though an ICFR opinion will not be issued, an auditor must gain an understanding of the entity’s ICFR, which may uncover significant deficiencies or material weaknesses.
These deficiencies or weaknesses must be communicated to management in writing. This communication should specifically state that the purpose of the audit was to report on the financial statements, not to provide assurance on the internal control structure.
(Choice A) Inherent limitations in ICFR are not addressed in financial audit internal control communications because the auditor does not express an opinion about the effectiveness of ICFR.
(Choice B) The auditor may issue a financial statement unqualified audit opinion based on audit evidence, even when corrective follow-up action has not been taken on internal control matters.
(Choice C) Poor ICFR is defined as deficiencies not detected by employees while performing assigned functions. Financial audit internal control communications require the definition of significant deficiencies and material weaknesses but do not require the auditor to restate the definition of poor ICFR.
Things to remember:
The communication of significant deficiencies or material weaknesses in internal control noted during nonissuer financial audits must state that the audit purpose was not to provide assurance on the internal control structure. This communication does not need to address internal control limitations or define internal control. An unqualified audit opinion is not dependent on correcting deficiencies or weaknesses.
Which of the following statements is correct concerning internal control matters identified in a nonissuer financial statement audit?
A. An auditor is required to search for internal control matters that require communication to client management.
B. All identified internal control matters are considered material weaknesses and must be communicated to the client’s management.
C. All internal control matters must be communicated orally to those charged with governance.
D. An auditor may report, in writing, that no material weaknesses were noted during an audit.
D. An auditor may report, in writing, that no material weaknesses were noted during an audit.
The purpose of a nonissuer financial statement audit (ie, financial audit) is to express an opinion on the fairness of the financial statements only. To assess the risk of material misstatement, the auditor must gain an understanding of internal control (I/C) over financial reporting.
In a nonisser financial audit, the auditor is not required to search for I/C matters (Choice A). However, when I/C matters are identified, the auditor must evaluate their severity and determine whether either significant deficiencies or material weaknesses exist. If no material weaknesses are noted, the auditor may issue a written report indicating such. However, this written report cannot indicate a lack of significant deficiencies because other I/C matters the auditor deems less significant may exist.
(Choice B) Not all I/C matters are material weaknesses. However, all identified material weaknesses and significant deficiencies must be reported in writing to those charged with governance.
(Choice C) An auditor must formally communicate I/C matters, specifically significant deficiencies and material weaknesses, to the client in writing, not orally.
Things to remember:
When performing a nonissuer financial audit, the auditor must gain an understanding of the internal controls over financial reporting but does not need to search for control matters. If the auditor determines that significant control deficiencies or material weaknesses exist, they must be reported, in writing, to those charged with governance. The auditor may also report that no material weaknesses were noted if that is the case.
Under PCAOB auditing standards, the auditor should communicate all of the following matters to an issuer’s audit committee at the beginning of the audit engagement except
A. Significant issues that the auditor discussed with management in connection with the auditor’s appointment/retention.
B. The terms of the engagement, including the objectives of the audit and the parties’ respective responsibilities.
C. The qualitative aspects of the entity’s significant accounting policies, including any indications of management bias.
D. An overview of the audit strategy and timing of the audit, along with any significant risks identified by the auditor.
C. The qualitative aspects of the entity’s significant accounting policies, including any indications of management bias.
The PCAOB has the authority to set standards for issuer audits. One of these standards requires the auditor to establish open communications with the client’s audit committee regarding matters related to the audit.
At the beginning of an engagement, the PCAOB standards require that the auditor:
Discuss with the audit committee any significant issues the auditor discussed with management in connection with the appointment or retention of the auditor (eg, accounting standards, application of accounting principles) (Choice A)
Establish an understanding of the terms of the audit engagement (eg, audit objective, responsibilities of the auditor versus management) (Choice B)
Provide an overview of the overall audit strategy (eg, timing of the audit, significant risks identified during the auditor’s risk assessment procedures) without providing details that could compromise the effectiveness of the audit (eg, specific planned audit procedures) (Choice D)
Inquire whether the audit committee is aware of anything relevant to the audit (eg, violations of laws or regulations, potential litigation)
The PCAOB standards require the auditor to discuss qualitative aspects of the client’s significant accounting policies, including indications of management bias, at the end of the audit. Audit procedures performed during the audit would highlight the quality of accounting policies and any potential management bias when applying those policies.
Things to remember:
PCAOB standards require the auditor to discuss qualitative aspects of the entity’s significant accounting policies, including any indications of management bias, at the end of the audit.
