In: Accounting
The auditor is required to render an opinion on the system of internal controls (for public companies). Which of the following would result in an adverse opinion being issued by an auditor related to internal controls?
The control risk is assessed at a low level.
The tests of controls support the documented understanding of controls.
There is a material weakness in the design or operation of controls.
A confirmation request is not returned to the auditor in a prompt manner.
The correct answer is "There is a mterial weakness in the design or operation of controls".
Reason:
1. The auditor passes an adverse opinion on internal controls of a public company if the internal controls are either not designed properly or they are not operating effectively throughout the year.
2. A control risk can be assessed at a low level if the company's internal controls have been designed properly and they are operating effectively throughout the year. It does not warrant expression of an adverse opinion.
3. If the test of controls support the documented understanding of controls, it means that the controls are actually operating in a way that the auditor assessed them to at the initial stage which again is a good thing and does not warrant expression of an adverse opinion.
4. A confirmation request not being returned to the auditor prompty has absolutely nothing to do with internal controls. Internal controls are plans, policies and procedures implemented by management of the company to detect, prevent and correct frauds. Since confirmation request is a part of the auditors' procedures, it does not form part of the internal controls.