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CPA: AUD: Sarbanes Oxley Act of 2002: Auditing Standard #5

Control deficiency

When the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis

Applicability of standard

When engaged to "perform an audit of management's assessment of the effectiveness of internal control over financial reporting" (ICFR); the objective of such an engagement is to express an opinion on the effectiveness of ICFR

Top-down Approach

Begins at financial statement level and works down to significant accounts and disclosures and assertions

Significant deficiency

A deficiency, or a combination of deficiencies, in ICFR that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting system


Following a transaction from origination through the company's processes until reflected in the financial records

Auditing Standard No. 5

An Audit of Internal Control Over Financial Reporting That is Integrated with An Audit of Financial Statements (Hint: which Auditing Standard #)

Elements of testing operating effectiveness

Inquiry, observation, inspection, re-performance

Material Weakness (Definition)

A deficiency, or combination of deficiencies, in internal control over financial reporting, that creates a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis

Operating effectiveness

The control is working as designed and the person performing the control has the necessary authority and qualifications to perform the control effectively

Expression of adverse opinion

Action required by auditor when material weakness exists

Communication requirements

All material weaknesses, significant deficiencies, and control deficiencies must be reported in writing to the management and/or the audit committee

Company level controls

Controls that often have a pervasive effect

Elements of testing design effectiveness

Inquiry, observation, inspection

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