Capturing and Reporting Internal Control Weaknesses

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Control Deficiencies

Charles B. Hall, CPA, CFE, Macc

[email protected]

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Overview

1. Red flags

2. Engagement letter

3. Encountering weaknesses

4. Filtering weaknesses

5. Capturing weaknesses

6. Communicating weaknesses

7. Effects on the audit

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Red Flags

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Obvious significant

weaknesses notcommunicated

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Documentationinconsistencies

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Material journal entriesand no deficiencies?

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Lack of control risk

assessmentdocumentation

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Engagement Letter

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Engagement Letter

1.No opinion on internal

controls2.Will communicate:

Significant deficiencies

Material weaknesses

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EncounteringWeaknesses

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Walkthroughs

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COSO

1.Control environment

2.Risk assessment3.Communication and

information

4.Monitoring

5.Controls

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Fraud interviews

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Journal entries

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Prior year comments

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Filter

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Control WeaknessesCategory Reportable? How?

Other

Deficiency

If merits

attention

Verbal or

in writingSignificant

DeficiencyRequired In Writing

MaterialWeakness

Required In Writing

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Significant Deficiency

A deficiency... that is less severe

than a material weakness, yetimportant enough to merit

attention by those charged with

governance

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Merit attention

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Material Weakness

A deficiency...such that there is areasonable possibility that a

material misstatement of the

entity's financial statements...

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Reasonable possibility

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Capturing

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Capturing

Audit teams responsibility

to capture the weakness

Engagement partners

responsibility to assessclassification of weakness

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Communicating

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Communication

1.SAS 115 Letter or2.Management Letter

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Communication - Clarity Project

Change

Communicate an

explanation of the potential

effects of the significantdeficiencies or material

weaknesses

Effects do not need to be

quantified

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Communication - Example

Entity lacks segregation of duties

The company may suffer theft

losses because one person

receipts, records, deposits andreconciles cash activity

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Effects on Audit

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Effect on Audit

1.Effect on control risk

assessment

2.Effect on audit steps

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Summary Comments

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Summary Comments

Beauty is in the eyeof the beholder

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Summary Comments

The leg bone isconnected to the hip

bone

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Summary Comments

It does not matteruntil it matters