a. Identify the audit approach the auditor could use to gather evidence regarding the effectiveness of the organization’s code of ethics. b. The partner in charge of the job appears to be persuaded that the differences are only subjective and is proposing that an unqualified opinion on internal controls be issued. Recognize that this is a first-year client—and an important one to the office. Apply the ethical framework developed earlier to explore the actions that should be taken by the manager on the audit regarding (1) whether to disagree with the partner and (2) if there is a disagreement, to what level it should be taken in the firm. c. Given the deficiencies noted, does the information support that there is a material weakness in internal control? If yes, what are the major factors that lead you to that conclusion?
The auditor is evaluating the internal control of a new client. Management has prepared its assessment of internal control and has concluded that it has some deficiencies but no significant deficiencies and no material weaknesses. However, in reviewing the work performed by management, including the internal auditor, the auditor observes the following:
-Sample sizes taken by the internal auditor were never more than ten transactions, and most of the tests of operating effectiveness were based on a sample of one performed as part of a walkthrough of a transaction.
-Management has fired the former CFO and a new CFO has not been appointed, but management indicates it has depth in the accounting area and is searching for a new CFO.
-The company has no formal whistleblowing function because management has an “open-door” policy so that anyone with a problem can take it up the line.
-Management’s approach to monitoring internal control is to compare budget with actual expenses and investigate differences.
In response to inquiries by the auditor, management responds that its procedures are sufficient to support its report on internal control. The auditor’s subsequent work yields the following:
-Many control procedures do not operate in the way described by management, and the procedures are not effective (not designed effectively).
-There is no awareness of, or adherence to, the company’s code of conduct.
-The accounting department does not have a depth of talent; moreover, although the department can handle most transactions, it is not capable of dealing with newer contracts that the firm has entered into. The response of management is, “That is why we pay you auditors the Big Bucks—Help us make these decisions.”
The auditor reaches a conclusion that there are material weaknesses in internal control, thus differing from management’s assessment. Management points out that every issue on which there is a disagreement is a subjective issue, and there is no one position that is better than the others. Management’s position is that these are management’s financial statements, and the auditor should accommodate management’s view because there are no right answers.
Required:
a. Identify the audit approach the auditor could use to gather evidence regarding the effectiveness of the organization’s code of ethics.
b. The partner in charge of the job appears to be persuaded that the differences are only subjective and is proposing that an unqualified opinion on internal controls be issued. Recognize that this is a first-year client—and an important one to the office. Apply the ethical framework developed earlier to explore the actions that should be taken by the manager on the audit regarding (1) whether to disagree with the partner and (2) if there is a disagreement, to what level it should be taken in the firm.
c. Given the deficiencies noted, does the information support that there is a material weakness in internal control? If yes, what are the major factors that lead you to that conclusion?
d. Assume that the engagement team makes a decision that there is a material weakness in internal controls. Write two or three paragraphs that describe those weaknesses.
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