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

An auditor tests a key control over purchase approvals. Of the sample tested, 3 exceptions were found. Evaluating the audit approach under the Guidance Note, which action is most consistent with it?

The auditor should evaluate the nature and cause of the exceptions, consider any compensating controls, and assess the likelihood and magnitude of potential misstatement to classify the deficiency as a control deficiency, significant deficiency or material weakness. Exceptions are neither ignored nor automatically material.

  1. AIgnore the exceptions because a sample cannot prove failure
  2. BEvaluate the nature and cause of the exceptions, consider compensating controls, and determine whether the deficiency is a significant deficiency or material weaknessCorrect
  3. CAutomatically conclude a material weakness exists whatever the amounts involved
  4. DReplace the test with inquiry of management alone

Explanation

The auditor must evaluate the severity of deficiencies by considering their cause, likelihood and potential magnitude of misstatement, and whether compensating controls mitigate them. Exceptions cannot be ignored, nor automatically classed as material weaknesses. Inquiry alone is not sufficient evidence of operating effectiveness.

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