ExpertHard1 markMultiple Choice
CPA · Question 10 · Area II: Risk Assessment
In an audit of an issuer, the auditor is assessing the control environment. Which of the following situations would most likely represent a significant deficiency or material weakness in the control environment?
In an audit of an issuer, the auditor is assessing the control environment. Which of the following situations would most likely represent a significant deficiency or material weakness in the control environment?
Answer options:
A.
Management uses a standard software package for payroll processing.
B.
The internal audit function reports to the audit committee.
C.
The audit committee does not actively oversee the entity's financial reporting policies and procedures.
D.
The company has a code of conduct but does not require annual written confirmation of compliance.
How to approach this question
Focus on the 'Tone at the Top' and the role of the Audit Committee in the COSO Control Environment.
Full Answer
C.The audit committee does not actively oversee the entity's financial reporting policies and procedures.✓ Correct
The audit committee does not actively oversee the entity's financial reporting policies and procedures.
The control environment sets the tone of an organization. An ineffective audit committee (one that does not actively oversee financial reporting) is a specific indicator of a material weakness in the control environment under PCAOB standards and COSO, as it undermines the check on management override.
Common mistakes
Focusing on transaction-level controls (like software) rather than entity-level controls (oversight).
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