Question

For each of the following independent situations, indicate the type of report on ICFR you would issue. Justify your report choice. a. Hansen, Inc., has restated previously issued financial statements to reflect the correction of a misstatement. b. Shu \& Han Engineering does not have effective oversight of the entity's external financial reporting. c. Kim Semiconductor has an ineffective audit committee. d. The internal audit function at Smith Components, a very large manufacturing company, was ineffective. The entity's auditor has determined that the internal audit function needed to be effective in order for the entity to have an effective monitoring component. e. The auditors of Benron identified significant financial statement fraud by the entity's chief financial officer. f. Conroy Trucking Company has an ineffective control environment. g. Edwards \& Eddins, CPAs, communicated significant deficiencies to Waste Disposal's management and the audit committee for the last two years. At the end of the current year, these significant deficiencies remain uncorrected.

Answer 1

An Adverse Opinion would be issued for all seven scenarios since each indicates a material weakness or significant deficiency in internal controls that could affect the reliability of financial reporting.

Step-by-step explanation:

When issuing a report on Internal Control over Financial Reporting (ICFR), auditors must evaluate the effectiveness of a company's internal controls. This assessment is crucial for protecting the interests of shareholders and other stakeholders, as it directly impacts the reliability of financial statements and compliance with regulations.

For Hansen, Inc., which restated its financial statements due to a misstatement, the type of report will likely be an Adverse Opinion if the misstatement indicates that the company had a material weakness in ICFR at the time those financial statements were issued.

Shu & Han Engineering, lacking effective oversight of external financial reporting, would also receive an Adverse Opinion considering effective oversight is a critical component of strong ICFR.

Kim Semiconductor would receive an Adverse Opinion on ICFR because an ineffective audit committee raises substantial doubt about the reliability of financial reporting and internal control effectiveness.

Smith Components would also merit an Adverse Opinion, given the ineffectiveness of the internal audit function, which is an essential part of the monitoring component of ICFR.

For Benron, discovering significant financial fraud perpetrated by the CFO would undoubtedly lead to an Adverse Opinion, as this suggests a material weakness in the control environment specifically related to fraud prevention and detection.

Conroy Trucking Company would also be issued an Adverse Opinion due to an ineffective control environment, which is the foundation of all other components of internal controls.

Lastly, Edwards & Eddins, CPAs would issue an Adverse Opinion for Waste Disposal, as the uncorrected significant deficiencies for two consecutive years indicate a failure to maintain effective ICFR.