Question

After the auditor has identified the key internal controls and deficiencies and assessed control risk for a private company, it is appropriate to decide whether:

Answer 1

The decision should be made on whether the identified deficiencies in key internal controls pose a significant risk to the accuracy of financial reporting for the private company.

Explanation

When evaluating key internal controls and deficiencies for a private company, it's crucial to ascertain whether these deficiencies could potentially lead to material misstatements in financial reporting. Control risk represents the probability that the company's internal controls fail to prevent or detect such misstatements. Assessing this risk involves understanding the severity of identified deficiencies and their impact on financial reporting accuracy.

To determine the significance of control deficiencies, it's essential to consider their potential effect on financial statements. This evaluation may involve a quantitative analysis, such as calculating the financial impact of control weaknesses on reported figures. By estimating the magnitude of misstatements that could occur due to these deficiencies, the auditor can gauge their materiality in financial reporting accuracy.

Moreover, the auditor assesses whether these control deficiencies are pervasive across various financial reporting areas or confined to specific sections. A broader spread of weaknesses might increase the risk of substantial misstatements, whereas isolated issues might have a limited effect. This consideration helps in determining the overall impact on financial reporting accuracy.

Understanding the impact of control deficiencies aids in making informed decisions about the company's financial reporting reliability. It allows the auditor to recommend necessary corrective actions or adjustments to mitigate potential risks and ensure the accuracy and integrity of financial statements.

Answer 2

After the auditor has identified the key internal controls and deficiencies and assessed control risk for a private company, it is appropriate to decide whether: to rely on internal controls or adjust audit procedures based on the assessed control risk, and communicate significant deficiencies and material weaknesses in internal control to management and governance.

Step-by-step explanation:

After an auditor has identified the key internal controls and deficiencies and assessed control risk for a private company, it is appropriate to decide whether:

• To rely on the identified internal controls in designing further audit procedures.
• To adjust the nature, timing, and extent of audit procedures based on the control risk assessment.
• To communicate significant deficiencies and material weaknesses to management and those charged with governance.

The decision to rely on the internal controls or adjust the audit procedures is based on the assessed level of control risk.

If control risk is high, the auditor may decide not to rely on the controls and instead perform more substantive testing.

If control risk is low, the auditor might decide to rely more on the controls and perform less substantive testing.

It's also mandatory for the auditor to communicate any significant deficiencies or material weaknesses in internal control to management and those charged with governance.