Chapter 18 - Solution Manual

CHAPTER 18

CHAPTER 18

Integrated A

Integrated Audits of Public

udits of Public Companies

Companies

Review Questions Review Questions 18-1

18-1 SectiSection 404on 404a requa requires tires that ehat each anach annual rnual report eport filefiled with d with the Sethe Securicurities aties and !cnd !changhange Comme Commissioissionn include an internal control report

include an internal control report prepared b" management in prepared b" management in which management ac#nowledgeswhich management ac#nowledges its responsibilit" for establishing and maintaining adequate internal control and an

its responsibilit" for establishing and maintaining adequate internal control and an assessment ofassessment of internal control effecti$e

internal control effecti$e as of the end of as of the end of the most recent fiscal year the most recent fiscal year % % Section 4Section 404b requir04b requires thates that the CPA

the CPA firm attest to and report on firm attest to and report on the assessment made b" management as well as the assessment made b" management as well as pro$ide itspro$ide its own opinion on internal control%

own opinion on internal control% 18-&

18-& As opeAs operatiorationalinali'ed b" 'ed b" the Sethe Securitcurities anies and !chd !change Cange Commommissioission( mann( managemenagement)s t)s four ofour o$eral$eralll responsibilit

responsibilities relating to ies relating to internal control o$er financial reporting *hereafter( internal control+,internal control o$er financial reporting *hereafter( internal control+,

•

• Accept responsibilit" for the effecti$eness of internal Accept responsibilit" for the effecti$eness of internal control%control% •

• $aluate the effecti$eness of internal control $aluate the effecti$eness of internal control using suitable control criteria%using suitable control criteria% •

• Support the e$aluation with sufficient e$idence%Support the e$aluation with sufficient e$idence% •

• Pro$ide a report on internal control%Pro$ide a report on internal control%

18-

18- .he fo.he followillowing inng informformation ation must bmust be incle included uded in main managemnagement)ent)s reps report on ort on inteinternal crnal controontrol o$erl o$er financial reporting,

financial reporting,

•

• State that it State that it is management)s responsibis management)s responsibilit" to establish and maintain ilit" to establish and maintain adequate internaladequate internal

control% control%

•

• Identif" management)s framewor# for e$aluating Identif" management)s framewor# for e$aluating internal control%internal control% •

• Include management)s assessmInclude management)s assessment of ent of the effecti$eness of the cothe effecti$eness of the compan")mpan")s internal controls internal control

o$er financial reporting

o$er financial reporting as of as of  the end of  the end of the most recent fiscal period( including athe most recent fiscal period( including a statement as to whether internal control o$er financial reporting is effecti$e% statement as to whether internal control o$er financial reporting is effecti$e%

•

• Include a statement that Include a statement that the compan")s auditors ha$e issued an attestation report onthe compan")s auditors ha$e issued an attestation report on

management)s assessment% management)s assessment%

18-1 18-1

18-4 A material wea#ness is considered more serious% A material wea#ness is a deficienc"( or a combination of deficiencies( in internal control o$er financial reporting( such that there is a reasonable possibilit" that a material misstatement of the compan")s annual or interim financial statements will not be pre$ented or detected on a timel" basis% A significant deficienc" is a

deficienc"( or a combination of deficiencies( in internal control o$er financial reporting that is less se$ere than a material wea#ness( "et important enough to merit attention b" those responsible for o$ersight of the compan")s financial reporting%

18-/ hile the first part is correct *both significant deficiencies and material wea#nesses must be communicated to the audit committee+( there is an important distinction between the two%

aterial wea#nesses result in ad$erse internal control audit reports( while significant deficiencies do not% Considering definitions( a material wea#ness is a deficienc"( or a combination of

deficiencies( in internal control o$er financial reporting( such that there is a reasonable possibilit" that a material misstatement of the compan")s annual or interim financial statements will not be  pre$ented or detected on a timel" basis% A significant deficienc" is a deficienc"( or a combination

of deficiencies( in internal control o$er financial reporting that is less se$ere than a material wea#ness( "et important enough to merit attention b" those responsible for o$ersight of the compan")s financial reporting%

18-2 hen reporting on internal control o$er financial reporting( the opinion is on whether internal control is effecti$e 3as of a particular date( ordinaril" the last da" of the client)s fiscal "ear% .his is in contrast to reporting on the effecti$eness of internal control o$er the entire "ear%

18-5 A compensating control limits the e!posure to misstatements that e!ists due to deficiencies in other controls% It 3compensates for the deficienc" in other controls( that is( it addresses the ob6ecti$e that is not being met b" the deficient control% Compensating controls are ordinaril" controls performed to detect( rather than pre$ent( a misstatement from occurring% 7or e!ample( a reconciliation of the ban# account performed b" an indi$idual otherwise independent of the cash function ser$es to detect a $ariet" of possible misstatements *both errors and fraud+ that ma" ha$e occurred in the processing of cash receipts and disbursements%

18-8 Antifraud programs * required+ include effecti$e,

• anagement accountabilit"% • Audit committee%

• Code of conductethics% • 3histleblower program%

• 9iring and promotion procedures%

• :emediation of significant deficiencies material wea#nesses( and fraud%

Students ma" include additional programs and elements%

18-; A wal#-through in$ol$es literall" tracing a transaction though the entire information s"stem from inception to financial reporting% Although generall" an effecti$e approach( wal#-throughs are not required during an audit of internal control o$er financial reporting% .he" ma" be performed b" the auditors or b" the client personnel under proper super$ision of the auditors%

18-10 Although an" number of inquiries ma" be made( inquiries such as the following are suggested * required+,

• Can "ou describe the part of the processing of the transaction with which "ou are

in$ol$ed<

• hat do "ou do when "ou find an error< • hat #ind of errors ha$e "ou found<

• hat happened as a result of finding the errors( and how were the errors resol$ed< • 9a$e "ou e$er been as#ed to o$erride the process or controls< If "es( wh" did it occur

and what happened<

18-11 al#throughs pro$ide the auditors with e$idence to,

• =erif" that the" ha$e identified points at which a significant ris# of misstatement to a

rele$ant assertion e!ists%

• =erif" their understanding of the design of controls( including those related to the

 pre$ention or detection of fraud%

• $aluate the effecti$eness of the design of controls%

• Confirm whether controls ha$e been place in operation *implemented+%

18-1&  Routine transactions are for recurring acti$ities( such as sales( purchases( cash receipts and disbursements( and pa"roll%  Nonroutine transactions occur onl" periodicall"( such as the ta#ing of ph"sical in$entor"( calculating depreciation e!pense or ad6usting for foreign currencies> nonroutine transactions generall" are not a part of the routine flow of transactions%  Estimation transactions *sometimes referred to as nonsystematic transactions + are acti$ities in$ol$ing management)s 6udgments or assumptions( such as determining the allowance for doubtful accounts( establishing warrant" reser$es( and assessing assets for impairment%

18-1 An account is significant if there is more than a remote li#elihood that it could contain

misstatements that indi$iduall"( or when aggregated with others( could ha$e a material effect on the financial statements%

7actors that should be considered in deciding whether an account is significant include its,

• Si'e and composition%

• Susceptibilit" of loss due to errors or fraud%

• =olume of acti$it"( comple!it" and homogeneit" of indi$idual transactions% •  ?ature of the account%

• Accounting and reporting comple!it"% • !posure to losses%

• @i#elihood of significant contingent liabilities • !istence of related part" transactions%

• Changes from the prior period%

18-14 hether the auditors must perform tests at each location depends upon the indi$idual importance of each location% .ests need onl" be performed at locations *or business units+ that( indi$iduall" or when aggregated( could create a material misstatement of the financial statements%

18-1/ .he statement is incorrect because auditors must first test design effecti$eness( and if the design seems appropriate( test operating effecti$eness to determine whether it is functioning properl"% It is not a choice of one $ersus the other( although tests of operating effecti$eness will not ordinaril"  be performed when the design is ineffecti$e%

18-12 An" number of possible e!amples ma" be gi$en in response to the question% ne e!ample is when a control is designed to require two indi$iduals to open each da")s cash receipts% It ma" not operate effecti$el" when the compan" allows one person to perform the function on da"s in which the second person is needed to perform another function% Also( such a control ma" not operate effecti$el" if the two indi$iduals simpl" di$ide the 6ob in half and perform the function independentl" of one another%

18-15 .he statement is correct% Standard ?o% / requires that additional e$idence be"ond inquir" alone  be gathered% .hus( the auditors should substantiate inquir" results to the e!tent possible b"  performing other procedures such as inspecting reports or other documentation relating to the

inquir"%

18-18 .he statement is incorrect in that some controls ma" be tested after the 3as of date *"ear-end+% A good e!ample are controls o$er the period-end financial reporting process in that the" often

function after "ear-end when the financial statements are being prepared%

18-1; .he auditors ma" use the wor# of others as a part of an audit of internal control% ne would ordinaril" e!pect that the wor# of others would in$ol$e testing more low-ris#( routine

transactions rather than per$asi$e and control en$ironment controls% In all cases in which the wor# of others is going to be used( the auditors should e$aluate the competence and ob6ecti$it" of  those indi$iduals and test the wor# the" ha$e performed%

18-&0 hen a substanti$e procedure identifies a misstatement( this will ordinaril" indicate that controls ha$e not operated effecti$el"% Accordingl"( this ma" lead to a consideration of the circumstances and whether a brea#down in controls indicates the e!istence of a significant deficienc" or a material wea#ness% Indeed( identification of a material misstatement in the current "ear financial statements that was not initiall" identified b" the compan")s internal control is considered at least a significant deficienc" and a strong indicator of a material wea#ness%

18-&1 .he performance of substanti$e tests ma" be affected b" tests of controls in circumstances in which a control deficienc" is identified% Substanti$e procedures ma" be increased to identif" an"  possible material misstatement%

18-&& ntit"-le$el controls ha$e a per$asi$e effect on the achie$ement of o$erall control ob6ecti$es *e%g%( tone at the top+ rather than a specific control ob6ecti$e%

18-& .he following represents transactions that are indicators of material wea#nesses in internal control *three required+,

• Identification of fraud( whether or not material( on the part of senior management • :estatement of pre$iousl" issued financial statements to reflect the correction of a

material misstatement%

• Identification b" the auditor of a material misstatement in circumstances that indicate that

the misstatement would not ha$e been detected b" the compan") internal control%

• Ineffecti$e o$ersight of the compan")s e!ternal financial reporting and internal control b"

the compan")s audit committee%

18-&4 .he opinion paragraph concludes directl" on internal control%

18-&/ A management imposed scope limitation is most li#el" to result in a disclaimer of opinion on the compan")s internal control o$er financial reporting( or possibl" withdrawal from the engagement% 18-&2 Bes( although a material wea#ness e!ists related to internal control( the financial statements ma"

still follow generall" accepted accounting principles and an unqualified audit report ma" be appropriate% 7or e!ample( a material wea#ness ma" ha$e been identified( but one which the auditors) substanti$e tests determined did not lead to a material misstatement during the "ear under audit% r( if a material misstatement did occur during the "ear under audit and

management has corrected it( an unqualified audit report on the financial statements would also  be appropriate%

18-&5 Auditors must communicate both significant deficiencies and material wea#nesses to the audit committee%

18-&8 hen the auditors are engaged to report on whether a pre$iousl" reported material wea#ness continues to e!ist( the" plan and perform an engagement the focuses on controls that are rele$ant to the particular wea#ness% If the" determine that the controls are now effecti$e( the auditors ma" issue an unqualified report indicating that the material wea#ness no longer e!ists%

Questions Reuiring Anal!sis

18-&; 7igure 18%5 presents the $arious lin#s between identif"ing significant accounts and the controls to  be tested% .hat sequence in$ol$es the following steps,

1%  Identify significant accounts and disclosures % Significant accounts and disclosures are those in which there is more than a remote li#elihood that it could contain misstatements that indi$iduall"( or when aggregated with others( could ha$e a material effect on the financial statements%

&%  Identify relevant financial statement assertions. .he financial statement assertions for significant accounts are, *1+ e!istence or occurrence> *&+ completeness> *+ $aluation or allocation> *4+ rights and obligations> */+ presentation and disclosures% .he rele$ant assertions are those that ha$e a meaningful bearing on whether the account is presented fairl"%

%  Identify significant processes and major classes of transactions. .he auditors identif" each significant process o$er each ma6or class of transactions% a6or classes of

transactions are those groupings of transactions that are significant to the financial statements% Consider a compan" whose sales ma" be initiated b" customers either through the Internet( or in a retail store% .hese t"pes of sales represent two ma6or classes of transactions within the sales processes% Also( for a compan" with a significant amount of fi!ed assets( recording depreciation is a process that creates a ma6or class of

transactions% hen auditors consider the ma6or classes of transactions it is helpful to classif" them b" what Standard ?o% / refers to as transaction type routine( nonroutine( or estimation%

7or each significant process( the auditors should,

• Dnderstand the flow of transactions *initiation( authori'ation( recording

 processing( reporting+%

• Identif" points at which a misstatement could arise% • Identif" controls to address potential misstatements%

• Identif" controls to pre$ent or timel" detect unauthori'ed acquisition( use or

disposition of the compan")s assets%

4%  Identify control objectives% .he control ob6ecti$es relate to the specific process in question% 7igure 18%; pro$ides an illustration for accounts recei$able% .he control ob6ecti$es include,

• nsure that all goods shipped are accuratel" billed in the proper period% • Accuratel" record all authori'ed shipments and onl" such shipments%

• Accuratel" record all authori'ed sales returns and allowances and onl" such

returns and allowances%

• nsure continued completeness and accurac" of accounts recei$able% • Safeguard accounts recei$able records%

/%  Identify controls to test. .he auditors identif" the controls to be tested b" considering the,

• Points at which errors or fraud could occur%

•  ?ature of the controls implemented b" management%

• Significance of each control in achie$ing the ob6ecti$es of the control criteria% • :is# that controls might not be operating effecti$el"

18-0 *a+ .he ob6ecti$e of tests of controls in an audit of internal control is to obtain e$idence about the effecti$eness of controls to support the auditors) opinion on whether

management)s assessment of the effecti$eness of internal control is fairl" stated as of a  point in time and taken as a whole. Accordingl"( to e!press this opinion the auditors

must obtain e$idence about the effecti$eness of controls o$er all rele$ant assertions for all significant accounts and disclosures in the financial statements% .his results in both testing controls not ordinaril" tested for a financial statement and emphasi'ing tests that  bear on their effecti$eness as of a point in time"ear-end%

*b+ .he ob6ecti$es of tests of controls for financial statement audits is to assist the auditors in  planning the audit and to assess control ris#% .o assess control ris# at less than the

ma!imum( the auditors are required to obtain e$idence that the rele$ant controls operated effecti$el" during the entire period  upon which the auditors plan to place reliance on those controls% 9owe$er( the auditors are not required to assess control ris# at less than the ma!imum for all assertions%

*c+ .o reconcile these approaches( Standard ?o% /( for purposes of the internal control audit( allows the auditors to obtain e$idence about operating effecti$eness at different times throughout the "earpro$ided that the auditors update those tests or obtain other

e$idence that the controls still operated effecti$el" at the end of the "ear% .hus( although the timing for issuing the internal control report would often not require tests throughout the "ear( the integrated nature of the two audits suggests a degree of testing throughout the "ear%

18-1 *a+ .he management of Ale!andria must gather sufficient e$idence to demonstrate that hiring the

controller has eliminated the material wea#ness( document the e$idence( and pro$ide a written assertion that the material wea#ness no longer e!ists%

*b+ ebster( arren E ebb should plan and perform an engagement the focuses on whether  the new controller has sufficient e!pertise to eliminate the material wea#ness% If the" determine that hiring the controller has mitigated the wea#ness( the auditors ma" issue an unqualified report indicating that the material wea#ness no longer e!ists%

*c+ If the audit team disco$ers another wea#ness during the course of the audit( it will not affect

the auditors) report% 9owe$er( the" should ma#e sure that the audit committee of Ale!andria is notified about the wea#ness%

"b#ective Questions 18-& ultiple Choice

*a+ *1+ PCAF Standard ?o% / requires that the auditors to communicate both material wea#nesses and significant deficiencies to the audit committee%

*b+ *&+ An audit report on internal control is modified for material wea#nesses( not significant deficiencies%

*c+ *1+ anagement must communicate both material wea#nesses and significant deficiencies to the audit committee%

*d+ *1+ PCAF Standard ?o% / includes Ineffecti$e o$ersight of financial reporting b" the audit committee is considered an indicator of a material wea#ness in internal control%

*e+ *&+ A material wea#ness in$ol$es a reasonable possibilit" of a material misstatement% *f+ *+ An unqualified opinion with no e!planator" language is appropriate when the

material wea#ness has been eliminated *remediated+ prior to the 3as of date( "ear-end%

*g+ *4+ anagement)s report on internal control under Section 404a of the Sarbanes-!le"

Act of &00& need not state that it has a responsibilit" to establish and maintain internal control that detects all significant deficiencies %

*h+ *&+ anagement)s documentation must include information on controls designed to  pre$ent fraud( but not on controls designed to ensure emplo"ee personal integrit"% *i+ *4+ A material wea#ness in$ol$es a material amount%

*6+ *4+ A wal#-through in$ol$es tracing a transaction from origination through a compan")s

information s"stems until it is reflected in the financial reporting s"stem% *#+ *+ Auditors will not ordinaril" as# what was the largest fraudulent transaction an

*l+ *1+ An audit of internal control o$er financial reporting ordinaril" assess internal control

at an 3as of dateordinaril" the last da" of the fiscal period%

18- 1% *A+ .he function of a credit department is to follow the compan")s credit policies to ma#e decisions on the granting of credit%

&% *F+ Sales returns should be presented to the recei$ing cler# *not a sales department cler#+ who should prepare a recei$ing report *not a shipping report+%

% *A+ Sending monthl" statements to customers represents a control strength as errors and fraud ma" be disco$ered%

4% *F+ rite-offs of accounts recei$able should be appro$ed b" a management official independent of the record#eeping function( not b" the controller who is

responsible for record#eeping% 7requentl"( the treasurer appro$es write-offs% /% *C+ hile requiring two signatures on large chec#s is a good control o$er

e!penditures( it relates much more directl" to the purchasesdisbursements c"cle than to the re$enue c"cle%

2% *A+ ailed cash receipts should be recei$ed b" an indi$idual with no record#eeping responsibilit"a secretar" with no record#eeping responsibilit" is appropriate% .hat indi$idual should open the mail and prepare a list of the receipts% .he cash should be forwarded with a cop" of the listed receipts to a cashier *or the

indi$idual who ma#es deposits+ and the remittance ad$ices should be forwarded with another cop" of the listed receipts to the accounting department%

5% *F+ As indicated in the answer e!planation to item 2( the cash receipts should be opened b" an indi$idual with no record#eeping responsibilit"% .he cash should  be forwarded with a cop" of the listed receipts to a cashier *or the indi$idual who

ma#es deposits+ and the remittance ad$ices should be forwarded with another cop" of the listed receipts to the accounting department%

8% *F+ .he cash receipts 6ournal should be prepared b" the department responsible for record#eepingaccountingunder the authorit" of the controller%

;% *F+ Cash should ordinaril" be deposited dail"%

10% *C+ .his control relates to the purchasesdisbursements c"cle%

11% *A+ Fan# reconciliations should be prepared b" indi$iduals independent of cash receipts *and cash disbursements+ record#eeping%

18-4 Simulation

*a+

Agree% =oided chec#s should be sa$ed so there is no question as to whether it is

$oided or outstanding%

*b+

Gisagree% ach ban# account ordinaril" has its own series%

*c+

Agree% Purchasing( which authori'es purchase( should not also sign chec#s(

which in essence disburse funds related to those purchases%

*d+

Agree% Chec#s ma" be made pa"able to cash ma" be cashed b" an inappropriate

 person%

*e+

Agree% Authori'ed chec# signers disburse funds and effecti$e o$ersight of the

disbursement function requires reconciliation b" another indi$idual%

*f+

Gisagree% Cash receipts should be so prelisted to establish control o$er total

receipts%

*g+

Gisagree% A polic" of restricti$el" endorsing receipt *e%g%( endorsing them 3pa"

onl" to Habling Co%+ is a control that ma#es it more difficult for another indi$idual

to cash the chec#s for personal use%

*h+

Gisagree% .his polic" eliminates the possibilit" of the support inappropriatel"

 being used to support an improper second disbursement using those documents%%

18-/

*a+

4

aterial wea#ness

*b+

1

Control deficienc"

*c+

;

Significant account

*d+

8

Section 404

*e+



a6or classes of transactions

*f+

1&

al#-through

Problem

18-2 S@D.I?, Slingsdale Fuilding Supplies( Inc% *stimated time, 0 minutes+

*a+ .he following deficiencies e!ist in Slingsdale)s cash receipts and billing functions,  Credit manager,

o Abilit" to appro$e credit without e!ternal credit chec# or reference to

established credit limits  A: super$isor,

o Filling without independent manual or computer $erification%

o Abilit" to alter details of charge forms and to use altered details in preparing

in$oices%

o  ?o chec# that dail" totals of charge forms equal dail" totals of in$oices%

o a" write off accounts because there is no independent $erification of the A:

subsidiar" ledger or reconciliation of it with the control account%

o @ong o$erdue accounts ma" remain on boo#s and additional credit granted b"

omitting them from monthl" report%  Cashier,

o Incompatible duties of recei$ing cash receipts( depositing cash( and recording

receipts on remittance ad$ices%

o  ?o independent $erification of cash receipts with deposit slips or lists of chec#s% o :econciling ban# statements is incompatible with recei$ing and depositing cash%

 Foo##eeper,

o Authori'es write-offs without in$estigating reasons for them%

o stablished criterion for write-offs is too infle!ible and does not pre$ent granting

additional credit at earlier date%

o Can indirectl" grant additional credit b" not notif"ing credit manager of

write-off%

o Incompatible duties of authori'ing and recording write-offs%

*b+ aterial wea#nesses result in an ad$erse opinion%

*c+ All material wea#nesses and significant deficiencies must be reported both to management and to the audit committee%

In$Class Team Case

18-5 S@D.I?, Control Geficiencies( Significant Geficiencies and aterial ea#nesses *stimated .ime--0 minutes+

Case 1

.he auditors would generall" determine that this deficienc" represents a significant deficienc"  because while an immaterial amount is li#el" to be in$ol$ed( it does seem large enough as to

merit informing those responsible for o$ersight of the compan")s financial reporting%

Case &

.he auditors are most li#el" to determine that the combination of these significant deficiencies represents a material wea#ness for the following reasons,

•Indi$iduall"( these deficiencies were e$aluated as representing significant deficiencies%

•ach of these significant deficiencies affects the same set of accounts and ta#en together ma"

represent a more than remote li#elihood that a material misstatement could occur and not  be pre$ented or detected%

.herefore( in combination( these significant deficiencies ma" represent a material wea#ness%

Case 

.he auditors are most li#el" to determine that a significant deficienc" for the following reasons,

• .he magnitude of a financial statement misstatement resulting from this deficienc" would

reasonabl" be e!pected to be less than material( although at a le$el that might merit the attention of those responsible for o$ersight of the compan")s financial reporting%

• .he ris# of material misstatement is limited to re$enue recognition errors related to

shipping terms as opposed to broader sources of error in re$enue recognition% 9owe$er( the compensating detecti$e controls are onl" designed to detect material misstatements% Case 4

Fased on onl" these facts( the auditors should determine that this deficienc" represents a material wea#ness for the following reasons,

• .he magnitude of a financial statement misstatement resulting from this deficienc"

would reasonabl" be e!pected to be material( because the frequenc" of occurrence allows insignificant amounts to become material in the aggregate%

• .he li#elihood of material misstatement of the financial statements resulting from this

internal control deficienc" is reasonabl" possible *e$en assuming that the amounts were full" reser$ed for in the compan"Js allowance for uncollectible accounts+ due to the li#elihood of material misstatement of the gross accounts recei$able balance%

.herefore( this internal control deficienc" meets the definition of a material wea#ness% Case /

A restatement of pre$iousl" issued financial statements to reflect the correction of a misstatement should be regarded as at least a significant deficienc" and a strong indicator that a material

wea#ness in internal control o$er financial reporting e!ists% If the auditors belie$e that management now #nows the rules this ma" be considered onl" a significant deficienc"  assuming the auditors don)t belie$e that this lac# of accounting #nowledge is a general problem in other areas%

Case 2

.he auditor)s identification of a material misstatement is an indicator of a material in internal control% Bet( the hiring of the financial accounting e!pert seems to indicate that the deficienc" does not e!ist at "ear-end% It seems clear that a material wea#ness in internal control does not e!ist at "ear-end%

Case 5

.he question here relates to whether the auditor belie$es that the chief financial officer)s

#nowledge and abilit" is sufficient to indicate that neither a material wea#ness nor a significant deficienc" e!ists at "ear-end% .he auditors would need to determine whether the chief financial officer is li#el" to be able to effecti$el" monitor matters% If not( a material wea#ness would seem to e!ist%

Case 8

PCAF Standard ?o / states that identification b" the auditor of a material misstatement in financial statements in the current period that was not initiall" identified b" the compan")s

internal control o$er financial reporting is a strong indicator of a material wea#ness% Fecause the auditors belie$e that the controller)s estimate is not reasonable( this would appear to be a strong indicate that a material wea#ness in internal control o$er financial reporting e!ists%