Control Deficiencies

Charles B. Hall, CPA, CFE, Macc chall@mmmcpa.com

Overview
1. Red flags
2. Engagement letter 3. Encountering weaknesses 4. Filtering weaknesses 5. Capturing weaknesses 6. Communicating weaknesses 7. Effects on the audit

Red Flags

Obvious significant weaknesses not communicated

Documentation inconsistencies

Material journal entries and no deficiencies?

Lack of control risk assessment documentation

Engagement Letter

Engagement Letter
1.No opinion on internal controls

2.Will communicate:

Significant deficiencies Material weaknesses

Encountering Weaknesses

Walkthroughs

COSO
1.Control environment

2.Risk assessment
3.Communication and information 4.Monitoring 5.Controls

Fraud interviews

Journal entries

Prior year comments

Filter

Control Weaknesses
Category Reportable? How?

Other Deficiency Significant Deficiency Material Weakness

If merits attention Required

Required

Verbal or in writing In Writing

In Writing

Significant Deficiency
A deficiency... that is less severe than a material weakness, yet important enough to merit attention by those charged with governance

Merit attention

Material Weakness
A deficiency...such that there is a reasonable possibility that a material misstatement of the entity's financial statements...

Reasonable possibility

Capturing

Capturing
Audit teams responsibility to capture the weakness Engagement partners responsibility to assess classification of weakness

Communicating

Communication
1.SAS 115 Letter or

2.Management Letter

Communication - Clarity Project Change

Communicate an explanation of the potential effects of the significant deficiencies or material weaknesses Effects do not need to be quantified

Communication - Example

Entity lacks segregation of duties

The company may suffer theft

losses because one person receipts, records, deposits and reconciles cash activity

Effects on Audit

Effect on Audit
1.Effect on control risk assessment 2.Effect on audit steps

Summary Comments

Summary Comments

Beauty is in the eye of the beholder

Summary Comments

The leg bone is connected to the hip bone

Summary Comments

It does not matter until it matters