Study Unit 9 - Internal Control Communications And Reports

Question 1

What is an auditor’s responsibility regarding deficiencies in a client’s internal control?

Answer 1

Although they are not required to perform procedures specifically to identify and express an opinion on internal control, auditors should provide written communication of the significant deficiencies and material weaknesses to management and those charged with governance.

Question 2

Compare a (1) material weakness and (2) significant deficiency in internal control.

Answer 2

Material Weakness Significant Deficiency

More severe Less severe

Results in a reasonable Merits attention by
Possibility that a material those charged with
Misstatement of financial governance
Statements will not be prevented
Or timely detected and corrected

Question 3

Give examples of indicators of material weakness in internal control.

Answer 3

• Fraud by senior management
• Restatement of financial statements
• Material misstatement not detected by internal control
• Ineffective oversight by those charged with governance

Question 4

When should communication relating to deficiencies in a client’s internal control be made?

Answer 4

Communication of all deficiencies should be made no later than 60 days after the audit report release date.

Question 5

Can an auditor make a communication stating that (1) no material weaknesses were identified or (2) no significant deficiencies were identified?

Answer 5

Communication stating that Allowed?

No material weaknesses were Yes
Identified

No significant deficiencies were No
Identified

Question 6

Who are typical governance bodies referred to as “those charged with governance”?

Answer 6

“Those charged with governance” typically refers to the board of directors and the audit committee.

Question 7

What is the preferred direction of communication between auditors and those charged with governance?

Answer 7

Two-way communication is preferred.

Question 8

Is the communication between auditors and those charged with governance only in writing?

Answer 8

Communication can be either oral or in writing as long as it is documented.

Question 9

Accounting t the Sarbanes-Oxley Act of 2002, what are the issues that auditors are required to report to those charged with governance?

Answer 9

• All critical accounting policies and practices to be used
• All material alternative treatment of financial information within GAAP discussed with management
• Ramifications of the use of alternative disclosures and treatments
• The treatment preferred by the auditor

Question 10

What type of audit is required for (1) accelerated-filer issuers and (2) nonissuers?

Answer 10

Accelerated-filer issuers An integrated audit - Audit of internal
(Market equity > $75m) control over financial reporting integrated
with the audit of the financial statements

Nonissuers Audit of financial statements (an audit of
internal control over financial statements
can be requested)

Question 11

What is the objective of an audit of internal control over financial reporting (CFR)?

Answer 11

The objective of an audit of internal control over ICFR is to obtain sufficient appropriate evidence to provide reasonable assurance that no material weaknesses exist in ICFR at the date of management’s assessment.

Question 12

Which type of opinion should auditors express if material weaknesses exist in a client’s internal control over financial reporting (ICFR)?

Answer 12

An adverse opinion is expressed on the effectiveness of ICFR.

Question 13

Name the audit approach used in integrated audits.

Answer 13

Top-down approach

Question 14

Define walkthrough, a procedure used in obtaining audit evidence.

Answer 14

A walkthrough is a procedure of following transaction through a process, from origin to the distribution of the final output.

Question 15

Describe a control deviation in determining whether a deficiency in internal control over financial reporting exists.

Answer 15

A control deviation occurs when a control does not operate as designed.

Question 16

What are the two factors considered in evaluating the severity of a deficiency in internal control over financial reporting?

Answer 16

1. The magnitude of the potential misstatement resulting from the deficiency or deficiencies
2. Whether a reasonable possibility exists that the entity’s control will fail to prevent, or detect and correct, a misstatement

Question 17

When should the audit report on internal control over financial reporting be dated?

Answer 17

It should be dated the same date as the audit report on the financial statements (no earlier than the date on which the auditor has obtained sufficient appropriate evidence to support eh opinion).

Question 18

Within the scope of an audit of service organizations, define a (1) user entity, (2) user auditor, (3) service organization, and (4) service auditor.

Answer 18

User entity - The entity who uses a service organization and whose financial statements are being auditied

User auditor - Audits and reports on the financial statement of the user entity

Service organization - Provides services to the user entity that are relevant to the user entity’s internal control over financial reporting.

Service auditor - Reports on the controls at the service organization

Question 19

Compare a (1) SOC 1 type 1 report and (2) SOC 1 type 2 report relating to audits of service organizations.

Answer 19

Reports on SOC 1 SOC 1
Type 1 Type 2
Report Report

Management’s descriptions Yes Yes
Of a Service organization’s
system

Suitability of the design Yes Yes
Of controls

Operating effectiveness No Yes
Of controls

Question 20

Which opinion(s) should a user auditor express if sufficient appropriate evidence regarding the services provided by the service organization relevant t the audit or the user entity cannot be obtained?

Answer 20

A qualified opinion or a disclaimer of opinion.

Question 21

When should a user auditor refer to the work of a service auditor?

Answer 21

A user auditor may refer to the work of a service auditor only when the user auditor’s report does not contain an unmodified opinion.