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ACC 410 Auditing Highest Level of Deficiency Case




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Highest Level of Deficiency Case
Highest Level of Deficiency Case
ACC 410 Auditing
For each of the following independent cases, state the highest level of
deficiency that you believe the circumstances represent a control
deficiency, a significant deficiency, or a material weakness. Explain your
decision in each case.
Case 1
The company processes a significant number of routine intercompany
transactions. Individual intercompany transactions are not material and
primarily relate to balance sheet activity--- for example, cash transfers
between business units to finance normal operations. A formal
management policy requires monthly reconciliation of intercompany
accounts and confirmation of balances between business units. However
there is not a process in place to ensure performance of these
procedures. As a result detailed reconciliation of intercompany accounts
are not performed on a timely basis. Management does perform monthly
procedures to investigate selected large-dollar intercompany account
differences. In addition management prepares a detailed monthly
variance analysis of operating expenses to assess their reasonableness.
I believe that this case represents a significant deficiency due to the fact
that reconciliation is not performed on time each month. Any
misstatement that might occur from this deficiency is more than likely to
be an immaterial amount, however management should still be notified.
Case 2
During its assessment of internal control over financial reporting,
management identified the following differences. Based on the context in
which the deficiencies occur, management and the auditors agree that
these deficiencies individually represent significant deficiencies:
* Inadequate segregation of duties over certain information system
access controls.

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* Several instances of transactions that were not properly recorded in the
subsidiary ledgers; the transactions involved were not material, either
individually or in the aggregate.
* No timely reconciliation of the account balances affected by the
improperly recorded transactions.
I believe that this case represents a material weakness, due to the fact
that there are multiple issues that all pertain to the same set of accounts.
I don’t believe that any one of the deficiencies individually would be a
material weakness, it is just the fact that there are several deficiencies all
in a similar area, and the combination of these significant deficiencies
represent a material weakness.
Case 3
The company uses a standard sales contract for most transactions,
although sales personnel are allowed to modify sales contract terms as
necessary to make a profitable sale. Individual sales transactions are not
material to the entity. The company’s accounting personnel review
significant or unusual modifications to sales contract terms, but they
don’t review the changes to the shipping terms. The changes in the
standard shipping terms could require a delay in the timing of revenue
recognition. Management reviews gross margins on a monthly basis and
investigates any significant or unusual relationships. In addition
management reviews the reasonableness of inventory levels at the end
of each accounting period. The company has experienced limited
situations in which revenue has been inappropriately recorded in
advance of shipment, but amounts have not been material.
The auditors are most likely to determine that a significant deficiency for
the following reasons:
* The magnitude of a financial statement misstatement resulting from
this deficiency would reasonably be expected to be less than material,
although at a level that might merit the attention of those responsible for
oversight of the company’s financial reporting.
* The risk of material misstatement is limited to revenue recognition
errors related to shipping terms as opposed to broader sources of error
in revenue recognition. However, the compensating detective controls
are only designed to detect material misstatements.

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