The following questions deal with deficiencies in internal control. Choose the best response.
a. Which of the following is an example of an operation deficiency in internal control?
(1) The company does not have a code of conduct for employees to consider.
(2) The cashier has online ability to post write-offs to accounts receivable accounts.
(3) Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.
(4) Management does not have a process to identify and assess risks on a recurring basis.
b. A material weakness in internal control represents a control deficiency that
(1) more than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably.
(2) results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.
(3) exists because a necessary control is missing or not properly designed.
(4) reduces the efficiency and effectiveness of the entity’s operations.
c. An auditor of a large public company identifies a material weakness in internal control. The auditor
(1) will be unable to issue an unqualified opinion on the financial statements.
(2) must issue a qualified or disclaimer of opinion on internal control over financial reporting.
(3) may still be able to issue an unqualified opinion on internal control over financial reporting.
(4) must issue an adverse opinion on internal control over financial reporting.
d. When a nonpublic company auditor’s tests of controls identify deficiencies in internal control over financial reporting, the auditor
(1) must communicate to management all deficiencies identified.
(2) must communicate both significant deficiencies and material weaknesses to those charged with governance.
(3) may communicate orally or in writing to the board all significant deficiencies and material weaknesses identified.
(4) must issue an adverse opinion on the financial statements.
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