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What items MUST be communicated to those charged with governance?
- S-P-A-M -- P-O-D-I-U-M
- Select of, changes in, and appropriateness of significant accting policies
- Processes used by mgmt in formulating significant accting estimates
- Adequacy of FS disclosures
- Mgmt judgments that are significant
- Planned scope and timing
- Other issues judged significant by the auditor
- Difficulties encountered in performing the audit
- Impairment to independence
- Uncorrected, nontrivial misstatements, and their possible effects on the audit opinion
- Management disagreements, whether or not resolved
What should be told to those charged with governance if they are not involved in managing the entity
- Material, corrected misstatements
- Accountants that mgmt consulted with
- Representations of mgmt requested by the auditor
- Significant issues or findings arising from the audit that were discussed with mgmt
Who can be a member of the audit committee?
Members of the board of directors who are "outside directors" = individual who are neither employees nor part of management and who do not have a material financial interest in the company.
Which of the organizations requires, and which strongly recommends, but does not require their member companies to use an audit committee?
- Members of the New York Stock Exchange are required to have an audit committee
- The SEC strongly recommends one
The audit committee is considered to be part of the [2 words] structure.
What are the specific functions assigned to the audit committee?
- Select & appoint the independent auditor
- Set the audit fee
- Assures that the auditor is independent of the company
- Review the nature, scope and details of the audit engagement
- Reviews the quality of the auditor’s work
- Maintains lines of communication between the auditor and the BoD
- Helps solve any disagreements regarding accting treatment of items material to the FS
- Evaluates the internal control of the company with the help of the independent auditor
True / False: The auditor should inform the audit committee that no significant deficiencies were identified when reviewing internal control
- This statement would imply that all internal controls were reviewed. The auditor should only disclose an internal control IF a significant deficiency or risk of material weakness exists.
True / False: The auditor is prevented from discussing with management the issues that it will discuss with the audit committee.
- It is good practice to inform management prior to meeting with the audit committee so that management isn’t “blindsided.” This is an informational mtg only; management doesn’t have to agree with anything the auditor will take to the audit committee.
According to Sarbanes-Oxley, which items is the auditor required to communicate to the audit committee for issuers?
- All critical accting policies
- All material alternative GAAP accting treatments
- Other material communications between the auditor and mgmt (mgmt letters, schedules of unadjusted differences, etc)
If an issuer does not have an audit committee, with whom is the auditor required to communicate items according to Sarbanes-Oxley?
The entire BoD
True / False: Inconsequential matters need not be communicated to the audit committee
True / False: Information must be communicated in writing to the audit committee.
- Information may either be in writing or oral, but if oral the conversation must be subsequently documented.
When providing written communication to the audit committee, which type of limitation must be included?
Written communications may be used only by the audience for whom it is intended, and is not to be used by others.
For audits of issuers, what is the deadline for communications regarding FS items?
Before issuance of the auditor’s report
Which auditing standards are followed for an integrated audit for a (1) nonissuer or (2) issuer?
- Nonissuer: SAS (AICPA)
- Issuer: PCAOB
Define control deficiency
When either the design OR operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, detect, or correct misstatements on a timely basis.
Define significant deficiency
A single or combination of deficiencies in internal control that can cause misstatement, though not necessarily of a material nature.
Define material weakness
A single or combination of deficiencies in internal control that has a reasonable possibility that a material misstatement of the FS will not be prevented, detected, or corrected on a timely basis.
Which is more severe, a significant deficiency or material weakness?
Material weakness as there is a reasonable possibility of not preventing or detecting a material misstatement.
What are the indicators of material weakness?
- Identification of any fraud by senior mgmt
- Restatement of previously issued FS to correct a material misstatement (obvious, if a material misstatement occurred, then the controls weren’t working right)
- ID by the auditor of a material misstatement that would not have been detected by the entity’s internal control
- Ineffective oversight by those charged with governance.
True / False: The determination of a material misstatement depends not only on the likelihood but also on the magnitude of the potential misstatement
The magnitude of the potential misstatement is a combination of which two factors?
dollar amount and volume
True / False: A material misstatement can occur with a low-dollar item when the volume is high
True / False: If management corrects a significant deficiency during the audit, the deficiency no longer needs to be reported to the audit committee
- All significant deficiencies andmaterial misstatements must be communicated to the audit committee even if corrected
A deficiency was discovered and communicated last year. The deficiency still exists for this year’s audit. What is the auditor’s responsibility regarding this issue?
The deficiency must be communicated again, in writing.
What is the deadline for communications regarding deficiencies in internal control?
- Preferably before issuance of the auditor’s report, but
- No later than 60 days after release.
Is the auditor required to communicate deficiencies in internal control, other than significant deficiencies or material weaknesses?
There is no requirement, but the auditor should inform management.
When communicating significant deficiencies or material weaknesses to the audit committee, what information should be included?
- The definition of those terms
- A description, including potential effects of the deficiency; however, the effects do NOT need to be quantified
- Clarification as to whether the auditor IS or IS NOT expected to express an opinion on the effectiveness of internal control.
- Clarification that the consideration of internal control was not designed to identify all deficiencies; thus, some may still exist.
- A limitation on the use of this information
True / False: Management may prepare a written response to the auditor’s communication regarding significant deficiencies and material weaknesses.