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Area IV: Forming Conclusions and ReportingAUDReportingInternal ControlPCAOB

CPA · Question 07 · Area IV: Forming Conclusions and Reporting

In an audit of an issuer, the auditor identifies a material weakness in internal control over financial reporting (ICFR). The auditor also determines that the financial statements are materially correct and issues an unqualified opinion on the financial statements. Which of the following describes the appropriate reporting on ICFR?

Answer options:

A.

Issue an unqualified opinion on ICFR since the financial statements are not misstated.

B.

Issue a qualified opinion on ICFR, citing the material weakness.

C.

Issue an adverse opinion on ICFR, explicitly stating the definition of a material weakness and that ICFR is not effective.

D.

Disclaimer of opinion on ICFR because the material weakness prevents the auditor from obtaining sufficient evidence.

How to approach this question

Distinguish between the Financial Statement opinion and the ICFR opinion. They can differ. A material weakness = Adverse ICFR opinion.

Full Answer

C.Issue an adverse opinion on ICFR, explicitly stating the definition of a material weakness and that ICFR is not effective.✓ Correct
C
PCAOB AS 2201 states that if one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective. The auditor must express an adverse opinion on the effectiveness of internal control.

Common mistakes

Thinking that because the financial statements are fine (no errors found), the controls must be fine. This ignores the 'could have' aspect of control risk.
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