Question

Provide examples of the different material weakness and significant deficiency; compare and contrast these two types.

Answer 1

The deficiency of the internal control system in financial reporting is called the control deficiency.

The control deficiency can be of 2 forms:

• Material weakness
• Significant deficiency

The significant deficiency is less severe than material weakness.Material weakness exists due to failure of the internal control of the organization.  Identification of material weakness can make the financial statements less reliable and increases the chances of error which could badly affect valuation. A significant deficient is less severe and occurence of an error is less likely. Material weakness should be identified and fixed in a timely manner. If it is not fixed, wrong information can hurt investors and make them withdraw their money due to the lack of trust and this will eventually hurt the stock price.

Examples of material weakness is:

• Identification of a fraud by a member of the senior management.
• The people who are charged with the responsibility of governance exhibit failure and incompetence in the oversight of the financial reporting system.
• Manipulation of the financial statements (overstating revenues an understating the expenses)

Examples of significant deficiency is :

• Failure to install anti fraud programs and controls.
• Failure to control o the transaction that do not take place in a regular manner and happens once in a while.