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Sarbanes Oxley Act -
Auditing Standards |
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Public
Company Accounting Oversight
Board
Bylaws
and Rules – Standards – AS2
Auditing
Standard No. 2: An Audit of Internal Control
Over Financial Reporting Performed in
Conjunction With an Audit of Financial
Statements
Example
D-3—Identification of
Several Deficiencies
Scenario A – Material
Weakness.
During
its assessment of internal control
over
financial
reporting, management identified the following
deficiencies. Based on the
context
in which the deficiencies occur, management and
the auditor agree that these
deficiencies
individually represent significant
deficiencies:
•
Inadequate segregation of duties over certain
information system access
controls.
•
Several instances of transactions that were not
properly recorded in subsidiary
ledgers;
transactions were not material, either
individually or in the
aggregate.
• A
lack of timely reconciliations of the account
balances affected by the
improperly
recorded
transactions.
Based
only on these facts, the auditor should
determine that the combination of
these
significant
deficiencies represents a material weakness for
the following reasons:
Individually,
these deficiencies were evaluated as
representing a more than remote
likelihood
that a misstatement that is more than
inconsequential, but less than
material,
could
occur. However, each of these significant
deficiencies affects the same set
of
accounts.
Taken
together, these significant deficiencies
represent a more than remote
likelihood
that a material misstatement could occur and not
be prevented or detected.
Therefore,
in combination, these significant deficiencies
represent a material
weakness.
Scenario B – Material
Weakness.
During
its assessment of internal control
over
financial
reporting, management of a financial institution
identifies deficiencies in: the
design
of controls over the estimation of credit losses
(a critical accounting
estimate);
the
operating effectiveness of controls for
initiating, processing, and
reviewing
adjustments
to the allowance for credit losses; and the
operating effectiveness of
controls
designed to prevent and detect the improper
recognition of interest income.
Management
and the auditor agree that, in their overall
context, each of these
deficiencies
individually represent a significant
deficiency.
In
addition, during the past year, the company
experienced a significant level of
growth
in
the loan balances that were subjected to the
controls governing credit loss
estimation
and
revenue recognition, and further growth is
expected in the upcoming year.
Based
only on these facts, the auditor should
determine that the combination of
these
significant
deficiencies represents a material weakness for
the following reasons:
•
The balances of the loan accounts affected by
these significant deficiencies
have
increased
over the past year and are expected to increase
in the future.
•
This growth in loan balances, coupled with the
combined effect of the
significant
deficiencies
described, results in a more than remote
likelihood that a material
misstatement
of the allowance for credit losses or interest
income could occur.
Therefore,
in combination, these deficiencies meet the
definition of a material
weakness.
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