An auditor is performing an audit of an issuer's internal control over financial reporting (ICFR). The auditor identifies a control deficiency. To determine if this deficiency is a material weakness, the auditor must evaluate:

Answer options:

Whether a material misstatement actually occurred.

The cost of correcting the deficiency.

The magnitude of the potential misstatement and the reasonable possibility that the control will fail.

Whether the control is automated or manual.

How to approach this question

Material Weakness Definition: 1. Likelihood (Reasonable Possibility). 2. Magnitude (Material). Memorize this combo.

Full Answer

C.The magnitude of the potential misstatement and the reasonable possibility that the control will fail.✓ Correct

A material weakness is a deficiency, or combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The evaluation depends on magnitude and likelihood.

Common mistakes

Thinking you need to find an actual error to call it a material weakness.

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