Integrated Audits of Public Companies (Chapter 18 Auditing)

Describe the difference between a significant deficiency and a material weakness in IC.

Material weakness - A control deficiency, or a combination of control deficiencies, in internal control over financial reporting. Significant deficiency - A deficiency, or a combination of deficiencies, in internal control over financial reporting. Material weaknesses involve a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis. Significant deficiencies are less severe than material weaknesses, yet important enough to merit attention by those responsible for oversight of the com[any's financial reporting.

What is meant by the "as of" date when reporting on internal control over financial reporting?

"As of" date refers to the end of the year being audited.

Identify management's four overall responsibilities with respect to internal control over financial reporting that arise due to the SECs implementation of the Sarbanes-Oxley Act of 2002

..Accept responsibility for the effectiveness of IC ..Evaluate the effectiveness of IC using suitable control criteria. ..Support the evaluation with sufficient evidence. ..Provide a report on IC.

Describe what is meant by a "walk through." Must walk throughs' be performed during audits of internal control over financial reporting? May the client perform a walk-through and the auditors then review the client's work?

A walk-through involves literally tracing a transaction from its origination through the company's information system until it is reflected in the company's financial reports.Walk-throughs may frequently be the most effective way to obtain an understanding of the likely sources of misstatement. Training is required to perform a walk-through and includes inquiry, observation, inspection of relevant documentation, and re performance of controls.It should be performed by an independent party.

While performing a walk-through, auditors ordinarily make certain inquiries of employees. Provide three examples of such inquiries.

Inquires should be made to help identify abuse of controls or indicators of fraud including... What do you do when you find an error? What kind of errors have you found? What happened as a result of finding the errors, and how were the errors resolved? Have you ever been asked to override the process or controls? If yes, why did it occur and what happened?

Provide examples of anti fraud programs that the auditors might expect the client to have.

Management accountability Audit committee Internal audit code of conduct/ethics "Whistle blower" program" Hiring and promotion procedures remediation

What information must be included in management's report on internal control over financial reporting in the annual report filed with SEC?

Management must .... *State that it is management's responsibility to establish and maintain adequate internal control. *Identify management's framework for evaluating IC *Include management's assessment of the effectiveness of the company;s internal control over financial reporting as of the end of the most recent fiscal period, including a statement as to whether internal control over financial reporting is effective *Include a statement that the company's auditors have issued an attestation report on management's assessment..

Comment on the accuracy of the following statement: "Since both significant deficiencies and material weaknesses must be reported to the audit committee, for practical purposes, there is no distinction between the two."

Material weaknesses can have an impact on the auditors opinion of the financial statements. Significant deficiencies does not result in a required modification of management's assessment.

What is a compensating control?

Compensating controls are ordinarily controls performed to detect, rather than prevent, the misstatement from occurring. It reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective.

Section 404 of the Sarbanes-Oxley Act of 2002 includes two sections. Describe those sections

Section 404 (a), which applied to all public companies, requires that each annual report filed with the SEC include an internal control report prepared by management in which management acknowledges its responsibility for establishing and maintaining adequate internal control and provodes an assessment of internal control effectiveness as of the end of the most recent fiscal year. Section 404 (b), which applies to public companies with a market capitalization in excess of $75 mil, requires the CPA firm to audit internal control and express an opinion on the effectiveness of internal control.