Last Updated: May 4, 2022 3:44:03 PM PDT Show
Learn about the 3 categories of deficiencies that may be identified during an external audit under SAS 115 requirements. Statement of Auditing Standards No. 115 (SAS 115) introduces new definitions of significant deficiency and material weakness that will lower the threshold for reportable control deficiencies at UCSD. The result is likely to be an increase in the number of reportable findings during the course of the external financial statement audit. Read about the 3 categories of deficiencies that may be identified during the external audit of the financial statements under SAS 115: 1. Control deficienciesThese exist when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely manner. Materiality of the control deficiency is not just determined by the actual misstatement (i.e., dollar amount of the error), but by the potential dollars that could also be incorrect. Examples of control deficiencies include:
2. Significant deficienciesSignificant deficiencies are a control deficiency, or combination of control deficiencies, that adversely affect the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with Generally Accepted Accounting Principles (GAAP) such that there is more than a remote likelihood that a misstatement of the entity's financial statements (that is more than inconsequential) will not be prevented or detected. 3. Material weaknessMaterial weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. All University departments must work together to protect UCSD with controls that support financial reporting and ensure that key controls are in place and operating as intended. A1. For purposes of this standard, the terms listed below are defined as follows - A2. A control objective provides a specific target against which to evaluate the effectiveness of controls. A control objective for internal control over financial reporting generally relates to a relevant assertion and states a criterion for evaluating whether the
company's control procedures in a specific area provide reasonable assurance that a misstatement or omission in that relevant assertion is prevented or detected by controls on a timely basis. A3. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a
timely basis. A4. Financial statements and related disclosures refers to a company's financial statements and notes to the financial statements as presented in accordance with generally accepted accounting principles ("GAAP"). References to financial statements and related disclosures do not extend to the preparation of management's discussion and analysis or other similar financial information presented outside a company's
GAAP-basis financial statements and notes. A5. Internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that -
A6. Management's assessment is the assessment described in Item 308(a)(3) of Regulations S-B and S-K that is included in management's annual report on internal control over financial reporting. 2/ A7. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
A8. Controls over financial reporting may be preventive controls or detective controls. Effective internal control over financial reporting often includes a combination of preventive and detective controls.
A9. A relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls. A10. An account or disclosure is a significant account or disclosure if there is a reasonable possibility that the account or disclosure could contain a misstatement that, individually or when aggregated with others, has a material effect on the financial statements, considering the risks of both overstatement and understatement. The determination of whether an account or disclosure is significant is based on inherent risk, without regard to the effect of controls. A11. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting. What is a significant deficiency in internal controls?A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.
What is an example of a significant deficiency?An example of a significant deficiency, as stated by the SEC, would be if a company's accounting function reviews significant or unusual modifications to the sales contract terms but does not review changes in the standard shipping terms.
What are types of control deficiencies?Examples of control deficiencies include:. Lack of timeliness of cash deposits and account reconciliation.. Lack of review and reconciliation of departmental expenditures.. Lack of overdraft funds monitoring.. Lack of physical inventory.. Which of the following is a weakness in internal control that allows a reasonable possibility?Unqualified. Which of the following is a weakness in internal control that allows a reasonable possibility that a significant (but less than material) misstatement may occur and not be detected? Significant deficiency.
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