Question

Section 404 of the Sarbanes Oxley Act requires auditors of a public company to analyze and report on the effectiveness of the client's internal controls over financial reporting. Describe the responsibilities that auditors of public companies have to discover and report (a) significant deficiencies in internal controls and (b) material weaknesses in internal controls. Include a definition of each item in your answer. Under what condition or conditions can auditors issue an unqualified or clean opinion on the effectiveness of a client's internal controls over financial reporting?

Answer 1

Note: Please note, that there is no specific definition of "Internal Control Deficiency" and "Significant Control deficiency" in the audit subject. Definition of Material Weakness has been added. In case of any further clarification please let me know.

Definiton of Internal Control: "Internal Control" means the planning of an organisation and all the policies and procedures adopted by an organisation's management to ensure orderly and efficient conduct of business.

Defintion of Material Weakness: "Material Weakness" is a weakness or deficiency in internal control due to which there is a possibility that the material misstatement in financial statement will not be prevented or detected on a timely basis.

It is not the responsibility of the auditorto identify each and every deficieny in Internal Control and express an opinion on it. His responsibility is "To communicate any significant deficiency in internal control identified during audit to management/Those Charged With Governance(TCWG)/Audit Committee.

Auditor can issue an unqualified or clean opinion on the effectiveness of a client's internal controls if their internal controls are seems effective to the auditor, if significant related party transactions are scrutinized by the management/TCWG, if Management fraud prevented by Internal Control, if non compliance of Laws & Regulations are prevented and properly followed by management, if Internal Control designed and implemented in a way so that it can prevent or detect and correct misstatements in Financial Statement on timely basis.