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

In an audit of internal financial controls, the auditor of Himalaya Foods Ltd. tests a control where the accounts head reviews monthly bank reconciliations, and finds that in 4 of 25 months sampled, the review was not evidenced and unreconciled items above the auditor's threshold remained uncleared. Which conclusion is most appropriate?

The auditor should treat the lapses as a control deficiency and evaluate whether, individually or combined, it is a material weakness, considering the likelihood and potential magnitude of misstatement and any compensating controls. It should neither be ignored on a percentage basis nor automatically trigger an adverse opinion.

  1. ATreat as a deficiency, evaluate whether it is a material weakness considering likelihood and magnitude of misstatement and any compensating controlsCorrect
  2. BIgnore it because 21 of 25 instances operated effectively, which is above 80%
  3. CConclude automatically that a material weakness exists and issue an adverse opinion on IFC
  4. DReport it only to the management orally since it concerns a detective control

Explanation

Control failures must be evaluated as deficiencies; the auditor assesses whether a reasonable possibility of material misstatement exists, considering compensating controls, and whether the deficiency is a material weakness. An automatic adverse opinion is wrong because it skips this evaluation, and an 84% operating rate does not excuse deviations with uncleared material items.

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