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:

Management uses a standard software package for payroll processing.

The internal audit function reports to the audit committee.

The audit committee does not actively oversee the entity's financial reporting policies and procedures.

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 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).

Question 09 All questions Question 11

Practice the full CPA AUD Practice Exam 5

78 questions · hints · full answers · grading

More questions from this exam

Q01A CPA firm is auditing the financial statements of a nonissuer, TechInnovate Inc. The lead engage...Hard Q02During the audit of an issuer, Gamma Corp, the audit firm proposes to provide tax services to the...Hard Q03An auditor is performing a Yellow Book audit (GAO Government Auditing Standards) for a state agen...Hard Q04A CPA is engaged to audit the financial statements of a nonissuer. During the audit, the CPA enco...Hard Q05Before accepting an audit engagement for a new nonissuer client, the successor auditor is require...Hard

View all 78 questions →