An auditor is engaged to perform an examination of internal control over financial reporting for a non-public entity. The auditor identifies a material weakness in internal control. Management acknowledges the weakness but believes the cost of remediation outweighs the benefits. Assuming the financial statements are not materially misstated as a result of this weakness, what is the appropriate reporting outcome for the internal control examination?
- AA disclaimer of opinion on the effectiveness of internal control.
- BA qualified opinion on the effectiveness of internal control.
- CAn unmodified opinion on the effectiveness of internal control.
- DAn adverse opinion on the effectiveness of internal control.
Show answer & explanationAnswer & explanation
Correct answer: D. An adverse opinion on the effectiveness of internal control.
A material weakness in internal control over financial reporting, by definition, means there is a reasonable possibility that a material misstatement will not be prevented or detected. Even if the financial statements are not currently misstated, the existence of a material weakness prevents the auditor from concluding that internal control is effective. Therefore, an adverse opinion is required.
Why the other options are wrong
- A. A disclaimer of opinion is typically issued due to a scope limitation that prevents the auditor from performing necessary procedures, not due to an identified material weakness.
- B. A qualified opinion is not permitted for an examination of internal control over financial reporting; it's either unmodified or adverse (or disclaimer for scope limitation).
- C. An unmodified opinion is issued only when there are no material weaknesses and internal control is effective.
Adverse Opinion on Internal Control
An adverse opinion is issued when an examination of internal control over financial reporting identifies one or more material weaknesses, indicating that the entity's internal control is not effective.
- Issued for one or more material weaknesses.
- Applies even if financial statements are not currently misstated.
- Permitted opinions for internal control are unmodified or adverse (or disclaimer).
Memory trick: A material weakness means the control 'factory' is broken, so the opinion is 'adversely' affected.