Answer: The auditor must communicate significant deficiencies and material weaknesses in writing to those charged with governance as soon as they become aware of their existence. The communication is usually addressed to the audit committee and to management. Timely communications may provide management an opportunity to address control deficiencies before management's report on internal control must be issued. In some instances, deficiencies can be corrected sufficiently early such that both management and the auditor can conclude that controlsare operating effectively as of the balance sheet date. These communications must be made no later than 60 days following the audit report release.Terms: Control activitiesDiff: ChallengingObjective: LO 10-5AACSB: Reflective thinking skills 20) The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach. 1. Identify existing controls. Because deficiencies and material weaknesses are the absence of adequate controls, the auditor must first know which controls exist. 2. Identify the absence of key controls. Internal control questionnaires, ﬂowcharts, and walkthroughs are useful tools to identify where controls are lacking and the likelihood of misstatement is therefore increased. 3.Consider the possibility of compensating controls. A compensating control is one elsewhere in the system that offsets the absence of a key control. When a compensating control exists, thereis no longer a significant deficiency or material weakness.4.Decide whether there is a significant deficiency or material weakness. The likelihood of misstatements and their materiality are used to evaluate if there are significant deficiencies or material weaknesses.5.Determine potential misstatements that could result. This step is intended to identify specific misstatements that are likely to result because of the significant deficiency or material weakness. The importance of a significant deficiency or material weakness is directly related to the likelihood and materiality of potential misstatements.Terms: Required communications between auditor and those charged with governanceDiff: ChallengingObjective: LO 10-5AACSB: Reflective thinking skills; Analytic skills31
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