Question

Auditing

Identify deficiencies in your client's system of internal control according to GAAS and PCAOB:

Stock compensation expense is 2.2 million understated because the Diector of SEC reporting in Alququerque made incorrect assumptions in the Black Shoes Model, she did not check her work and it was not reviewed by anyone else.

Deficiencies include IPE (information produced by the entity) errors, year-ended inventory count errors, errors, errors in the capitalization of fixed assets, and errors in the conclusion of the entity's Black Sholes model that is used to calculate stock computation

Are these significant deficiencies or material weaknesses?

Answer 1

Solution:

According to GAAS and PCAOB, it will be considered as significant deficiency that contributed to material misstatement.

Only the material weakness will be disclosed in the auditor’s report. Therefore, it is very important to evaluate the identified deficiency.

Evaluating identified deficiency:

It is been observed by the auditor that there has been deficiency on the information provided. The deficiency in the information provided in the calculation of the stock computation.

The severity of the deficiency is not the error in the misstatement inventory count or Capitalisation of the fixed asset, but need to understand the companies control. Whether the companies control fails to prevent or detect the misstatement.

It is been also observed by the auditor that the effect of the compensating control is a material weakness. The compensating control failed to operate at the level of precision which would prevent or detect a misstatement that could be material.

Since the compensation amount is 2.2 million understated this will be considered as material misstatement. This will be considered as material deficiency that needs to be disclosed in the auditor’s report.