[jingsf19]

Hi all,

I have a question regarding material weakness in internal control. Below is the difinition of material weakness, I don’t understand the second point, why restatement of previously issued financial statements to reflect the correction of a material misstatement is considered a material weakness in internal control?? Anyone could help?? Thank you very much!

AU-C §265.A11 includes a list of indicators of control deficiencies that are regarded as indicators of material weaknessesin internal control:
· Identification of fraud of any magnitude on the part of senior management;
· Restatement of previously issued financial statements to reflect the correction of a material misstatement, which includes misstatements due to error or fraud.
· Identification by the auditor of a material misstatement in the financial statements for the period under audit that in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control.
· Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance.

[brainfried75]

The second point reads, “Restatement of previously issued financial statements to reflect the correction of a material misstatement, which includes misstatements due to error or fraud.” In this context, the auditor previously issued these financial statements but there have now been corrections made because there were misstatements due to fraud, thus the auditor had to reissue the financial statements. The material weakness was the misstatement due to error or fraud.

[charlesrskinner]

This is because the error or fraud should have been caught by an internal control. Since it was not, the amount was material and obviously is more than likely to occur there for it is a material weakness in internal control. It was a failure of internal controls to identify the error or detect the fraud.

[jingsf19]

Thank you so much for the reply.

[Author]

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