Question

Lorien Corp., a client, has received a research grant from the federal government. As a

condition of the grant, the government requires a report on management’s assertion about the

effectiveness of the company’s internal control using a prescribed form that addresses only

certain criteria. If the accountant discovers a material weakness not addressed by the

government form, (s)he should

A. Not assume responsibility for the comprehensiveness of the agency’s criteria.

B. Not include this information because it is outside the established criteria.

C. Not include this information but inform management of the weakness.

D. Include all information in a standard report based on an audit in accordance with GAAS

because the government’s criteria are too limited.

Answer 1

As per the Generally Accepted Auditing principles, the auditor has to maintain confidentiality of all the information obtained during the audit. If the auditor comes across any weakness, he has to inform the management or those charged with governance immediately. The auditor should not disclose the weakness to anyone other than the management. However, if any regulation or law (of that country) requires auditor to report weakness to regulating authority, the same responsibility has to be fulfilled. The auditor’s legal responsibility is over and above the professional responsibility of maintaining confidentiality.

In the given situation, the auditor is given a particular format for reporting on management’s assertion.

As the weakness found out during the audit has not been given in the format prescribed by the government, the auditor need not report it to the government. But the same has to be informed to the management or those charged with governance. (Sufficient documentation and evidence has to be maintained for communication of these weaknesses).

Hence, the correct answer is option C – Not include information but inform management of the weakness.