For each of the following independent cases, state the highest level of deficiency that you believe the

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Question:

For each of the following independent cases, state the highest level of deficiency that you believe the circumstances represent: a control deficiency, a significant deficiency, or a material weakness. Explain your decision in detail for each case. What audit procedures would you consider doing for each case as part of the audit plan.

Case 6: Assume the same facts exist as in Case 5 except that you, the auditor, have identified the misstatements at the end of June of the year currently under audit. Members of management acknowledged that the misstatements occurred because they simply didn’t know the rules at the time, and now they know the rules. Management, within the last six months of the year under audit, hired a new financial accounting expert and believes that the control weakness has been corrected as of year-end. Management believes that it is extremely unlikely that such a misstatement could occur again with the new expert reviewing these matters.

Case 7: Assume the same facts exist as in Case 6, except that management has informed the chief financial officer that she must watch over these matters much more carefully. She has attended several CPE courses on accounting and seems to be caught up in the area in which the misstatements occurred.

Case 8: Subsequent to year-end, the auditors have determined that they believe that management has understated its warranty obligations. The auditors know that, according to the Professional Standards, they should consider the difference between management’s estimate and the closest reasonable estimate as “likely misstatement.” The chief financial officer (CFO) has argued that this amount is reasonable. Yet, in fact, neither the auditors nor the CFO know which amount is right. The CFO is under no particular pressure to meet an earnings forecast; he thinks that the warranty obligations for many of the products will expire and will not be exercised. Still, the CFO can’t convince the auditors. Likewise, the auditors can’t convince the CFO of their position. The CFO finally agrees to a material adjustment to get to the auditor’s amount and “keep the peace”.