CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is performing tests of controls over cash disbursements. The control requires that all checks over $10,000 be approved by two authorized signatories. The auditor selects a sample of 30 checks exceeding $10,000 and finds that 3 of them only have one signatory. This finding is considered a:
- AFraudulent disbursement.
- BSignificant deficiency.
- CMaterial weakness.
- DControl deficiency.
Show answer & explanationAnswer & explanation
Correct answer: D. Control deficiency.
A control deficiency exists when the design or operation of a control does not permit management or employees to prevent or detect misstatements on a timely basis. Finding three checks lacking a required signatory indicates that the control is not operating as intended.
Why the other options are wrong
- A. While a control deficiency could enable fraud, the finding itself is a control failure, not necessarily a fraudulent act.
- B. A significant deficiency is less severe than a material weakness, but more severe than a control deficiency. This finding alone doesn't necessarily indicate a significant deficiency without further assessment of magnitude and likelihood.
- C. A material weakness is a deficiency (or combination of deficiencies) in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected on a timely basis. Three deviations in a sample of 30, without knowing the potential misstatement amount, is not automatically a material weakness.
Control Deficiency
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
- The least severe type of internal control deficiency.
- Indicates a control is not operating as designed.
- May or may not lead to a significant deficiency or material weakness.
Memory trick: CDM: Control, Deficiency, Material weakness.