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Unformatted text preview: CHAPTER 18 Integrated Audits of Public Companies Review Questions 18-1 Section 404a requires that each annual report filed with the Securities and Exchange Commission include an internal control report prepared by management in which management acknowledges its responsibility for establishing and maintaining adequate internal control and an assessment of internal control effective as of the end of the most recent fiscal year . Section 404b requires that the CPA firm attest to and report on the assessment made by management as well as provide its own opinion on internal control. 18-2 As operationalized by the Securities and Exchange Commission, management’s four overall responsibilities relating to internal control over financial reporting (hereafter, internal control): • Accept responsibility for the effectiveness of internal control. • Evaluate the effectiveness of internal control using suitable control criteria. • Support the evaluation with sufficient evidence. • Provide a report on internal control. 18-3 The following information must be included in management’s report on internal control over financial reporting: • State that it is management’s responsibility to establish and maintain adequate internal control. • Identify management’s framework for evaluating internal control. • Include management’s assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the most recent fiscal period, including a statement as to whether internal control over financial reporting is effective. • Include a statement that the company’s auditors have issued an attestation report on management’s assessment. 18-4 The difference between a significant deficiency and a material weakness is the potential amount involved. A significant deficiency that is not a material weakness involves a more than remote likelihood of an misstatement that is less than material, but more than inconsequential. A material weakness involves a material potential misstatement. 18-5 While the first part is correct (all material weaknesses are significant deficiencies), the second part is not correct in that not all significant deficiencies are material weaknesses. Those significant deficiencies that involve a more than remote likelihood of a misstatement that is more than inconsequential but less than material are not material weaknesses. 18-6 When reporting on internal control over financial reporting, the opinion is on whether internal control is effective “as of” a particular date, ordinarily the last day of the client’s fiscal year. This is in contrast to reporting on the effectiveness of internal control over the entire year....
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This note was uploaded on 06/11/2008 for the course ACCT 4013 taught by Professor Pitman,m during the Spring '08 term at The University of Texas at San Antonio- San Antonio.
- Spring '08