Often times, concluding on the severity of a deficiency requires a conversation with the client. What are
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Question:
- Often times, concluding on the severity of a deficiency requires a conversation with the client. What are some questions that you might ask the client in order to assess the severity of any potential control deficiencies identified (CD, SD, MW)? Include these questions in the A/R "Questions" prompt below. What details might you be needing to understand around "likelihood of a misstatement" resulting from the deficiency and "potential magnitude of the misstatement" that could result from the deficiency (assuming a misstatement is likely) in order to conclude on severity of the control deficiency?
- Describe these details in the A/R "Considerations" prompt below.
- Note on Magnitude of potential misstatement: If a full account balance has been recalculated by our team (as in the case of the Allowance), it is not a "potential" misstatement we are considering, but rather, a "known" misstatement. However, if only a sample of the balance has been tested (as in the case of Accounts Receivable), there is a "potential" misstatement that you need to assess the magnitude of (how much of the account is exposed to the types of deficiencies identified?).You should think about this in formulating your questions to the client, to help finalize your view on the above. Allowance for Doubtful Accounts has been filled out for you as an example below.
- Allowance:
- Questions:
- What are the controls in place around this process? What caused this error? (Stale data used for calculation, calculation not performed in the current year, calc was performed but Trial Balance wasn't updated for the calc, etc.)
- Considerations around CD, SD, MW: We are looking to understand why this adjustment was missed: what controls are in place around this calculation, and which control failed in the process. In considering likelihood and magnitude, while it is "likely" a misstatement would occur (since it did occur), since we know the exact calculation for the allowance, based on company policy, the full balance can be calculated, and the difference between our calculated allowance and that recorded per the client = the "magnitude" of the actual misstatement. Therefore, we will likely conclude a CD that does not rise to the level of SD or MW in light of materiality of the known misstatement.
- Accounts receivable:
- Questions:
- Considerations around CD, SD, MW:
Related Book For
Auditing A Business Risk Approach
ISBN: 978-0538476232
8th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg
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