This case gives students an opportunity to (1) understand the process of evaluating ident

This case gives students an opportunity to (1) understand the process of evaluating identified control deficiencies; (2) understand the annual disclosure requirements for management’s report on internal control over financial reporting (ICFR); and (3) determine the effect of identified control deficiencies on other controls. Students are required to read the case and address the five questions listed on the last page.

1. Briefly explain the misstatements made in the company financial statement. How did ‘accepting a vendor change request and making payments to an incorrect bank account’ affect the Accounts Payable balance? 

2. According to PCAOB Auditing Standard (AS 2201) (https://pcaobus.org/Standards/Auditing/Pages/AS2201.aspx), what factors should auditors consider when evaluating the severity of a deficiency in a control that directly addresses a risk of material misstatement? 

3. PCAOB AS 2201 distinguishes the difference between a deficiency in design and a deficiency in operation. First, explain what auditors should consider when making the distinction. Second, determine whether the Assistant Controller’s failure to adequately review the Vendor Change Form represents a deficiency in the design or operating effectiveness of the control. 

4. Based on guidance in AS 2201, determine if the failure in the vendor request change form control indicative of a material weakness in internal control over financial reporting. Consider both quantitative and qualitative factors. 

5. SEC Regulation S-K requires that management provide a report on a registrant’s ICFR in the company’s Form 10-K. Assuming the company and the auditor concluded that this internal control failure indicates a material weakness in internal control, what information would the company management be expected to disclose? 

6. Assuming the company and the auditor concluded that this internal control failure is not severe enough to be a material weakness but indicates a significant deficiency in internal control, explain the next steps for auditors. What kinds of obligation auditors have in terms of communicating the results (e.g. To whom do they report? And How?) Compare and contrast with the case of material weakness. 

7. Assume the auditor believe the deficiency is a material weakness, but the company pleads that a material weakness in internal controls will greatly damage the company’s reputation. The company notifies the auditor that the company will consider changing the auditor in the subsequent year if the auditor concludes the deficiency is a material weakness. ABC Retailers Inc. is an important client for the auditor, and losing the client will have a nontrivial impact on the auditor’s revenue. What should the auditor do? Based on what we learned in Module B and C of the textbook, explain possible consequences for the auditor who agrees to issue a more favorable report in order to retain the client. (The situations described in 5, 6, and 7 are independent from one another.) The list above does not present a complete list of issues related to the topic. You may additionally discuss other issues relevant to the audit process of internal control in your paper.