14-sol-CH 18 - CHAPTER 18 Integrated Audits of Public...

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CHAPTER 18 Integrated Audits of Public Companies 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 A material weakness is considered more serious. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting. 18-5 While the first part is correct (both significant deficiencies and material weaknesses must be communicated to the audit committee), there is an important distinction between the two. Material weaknesses result in adverse internal control audit reports, while significant deficiencies do not. Considering definitions, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies,
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