C. Ronaldo is an auditor working on the ICFR audit for the Manchester Corporation. Interest expense is an account that could produce a material misstatement on the financial statements, so it is tested in the ICFR audit. After performing a walkthrough the senior determines that the controls over interest expense are designed effectively. The audit plan for the ICFR audit includes testing an automated control for calculating interest expense transactions. In the audit planning stages, the senior sets the tolerable rate of error for this particular automated control at 2%. The audit plan directs C. Ronaldo to conducts his tests using a sample based on a non statistical approach. C. Ronaldo selects the sample and conducts the reperformance procedure the audit plan calls for to test the operating effectiveness of the control. He finds instances in 3% of his sample where the control did not operate as intended.
Does C. Ronaldo’s testing indicate a deficiency in the control tested? If so, what is the next step? If C. Ronaldo’s results are valid, do you think the deficiency is severe enough to be a significant deficiency or a material weakness? What impact does that have on the ICFR audit opinion? What impact do the findings have on the financial statement audit plan?