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(2) Existing control isnt properly designed, control of objective isnt met
Operation deficiency exists when properly designed control doesnt operate as designed or when person performing control
doesnt poses necessary authority or qualifications
Material Weakness: deficiency or combination of deficiencies, in ICFR that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis
Significant Deficiency: is a control deficiency, or combination of control deficiencies in ICFR that is less severe than a material
weakness yet important enough to merit attention by those responsible for oversight of the entitys financial reporting
sLikelihood and Magnitude
Remote: identified control issue does not even rise to the level of control deficiency
Look at figure 7.1 on pg. 228
7.5 Managements Assessment Process
Step 1: Identify Financial Reporting Risks and Related Controls
Risk that a misstatement could result in a material misstatement of the financial statements
How management assesses is based on industry
Management identifies controls that are in place to address f.s. Reporting risks
Mgmt. evaluates whether controls in place to address entity-level controls & other elements of ICFR
Mgmt. should consider the effect of information technology general controls
Mgmt. must obtain and doc reasonable evidential support
Step 2: Consider which locations to include in the evaluation
Step 3: Evaluate Evidence about the Operating Effectiveness of ICFR
Considers whether the control is operating as designed and whether the person performing the control possesses the
necessary authority and competence to perform the control effectively
Mgmt. should focus on highest risk of ICFR
Direct test of controls: performed on periodic basis by individuals like auditors with respect to control
Reporting Considerations
No material weakness: conclude entitys ICFR was effective
Material weakness: management must disclose material weakness in its assessment of effectiveness of ICFR on annual basis
o
Nature of material weakness
o
Impact on entitys financial reporting & ICFR
o
Managements current plans, if any, for remediating material weakness
-- Mgmt. assessment process involves: (1) service organizations & (2) safeguarding assets