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CMA Intermediate · Corporate Accounting and Auditing · Report on Internal Financial Control over Financial Reporting

A statutory auditor finds that a material weakness exists in a company's internal financial controls over financial reporting, so that there is a reasonable possibility of a material misstatement not being prevented or detected on a timely basis. In the report on internal financial controls, the auditor should most appropriately:

The auditor should give an adverse opinion on the operating effectiveness of internal financial controls and describe the material weakness. A clean opinion is inappropriate because the weakness means controls are not effective, and the separate opinion on financial statements is assessed independently.

  1. Aissue an adverse opinion on the operating effectiveness of internal financial controls, describing the material weaknessCorrect
  2. Bissue an unmodified opinion because the financial statements are not qualified
  3. Cwithdraw from the audit engagement immediately
  4. Ddisclaim the opinion because controls cannot be tested

Explanation

Under the ICAI Guidance Note on audit of internal financial controls, a material weakness means the company has not maintained adequate controls operating effectively, so an adverse opinion on ICFR is appropriate. The financial statement opinion is separate; the weakness is described and its effect on audit procedures considered. Withdrawal or disclaimer is not required when testing is possible.

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