CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesEasy
A CPA firm is performing an annual audit for a public company. During the audit, the engagement team identifies a significant deficiency in internal control related to the company's revenue recognition process. The company's management has acknowledged the deficiency but states that they have no immediate plans to remediate it due to cost considerations. What is the auditor's primary responsibility regarding this identified deficiency?
- AReport the deficiency directly to the Securities and Exchange Commission (SEC).
- BInclude a disclaimer of opinion in the audit report, citing the unremediated deficiency.
- CIssue an adverse opinion on the financial statements due to the significant deficiency.
- DModify the audit procedures to address the increased risk of material misstatement.
Show answer & explanationAnswer & explanation
Correct answer: D. Modify the audit procedures to address the increased risk of material misstatement.
When a significant deficiency or material weakness is identified, the auditor's primary responsibility is to consider its impact on the audit strategy and modify audit procedures to obtain sufficient appropriate evidence regarding the financial statements. It does not automatically lead to a modified opinion on the financial statements or direct reporting to regulators.
Why the other options are wrong
- A. Auditors generally report control deficiencies to management and those charged with governance, not directly to external regulators like the SEC, unless there is a legal or regulatory requirement (e.g., for certain NOCLAR).
- B. A disclaimer of opinion is for scope limitations, not for identified control deficiencies unless they prevent obtaining sufficient evidence.
- C. An adverse opinion is typically for material and pervasive misstatements, not solely for a significant deficiency in internal control.
Auditor's Response to Control Deficiencies
Upon identifying internal control deficiencies, the auditor must evaluate their severity and impact on the audit, then modify audit procedures accordingly to obtain sufficient appropriate audit evidence.
- Severity determines classification: control deficiency, significant deficiency, material weakness.
- Significant deficiencies and material weaknesses must be communicated to management and those charged with governance.
- Impacts the nature, timing, and extent of substantive procedures.
Memory trick: Deficiency Found, Audit Adjusted.