This is from Problem 6-31. Textbook: Auditing and Assurance Services: A systemat

Question

This is from Problem 6-31. Textbook: Auditing and Assurance Services: A systematic approach 9th Edition

Ken Smith, the partner in charge of the auit of Houghton Enterprises, identified the following significant deficiencies during the audit of the December 31, 2013, financial statements:

1. controls for granting credit to new customers were not adequate. in particular, the credit department did not adequately check the creditworthiness of customers with an outside credit agency.

2. there were inadequate physical safeguards over the company's inventory. no safeguards prevented employees from stealing high-value inventory parts.

Required:

A. Draft the required communications to the management of Houghton Enterprises, assuming that both items are significant deficiencies.

B. Assume that Smith determined that the second item was a material weakenss. How would the required communication change?

Explanation / Answer

In planning & performing our audit of the financial statement of Houghton enterprises for the year ended 31, December 2013 in accordance with auditing standard and accepting auditing practicing. Internal control is the basic of expressing our opinion on the financial statement but not for the purpose of expressing our opinion of the effectiveness of the company’s internal control. Accordingly we do not express our opinion on the effectiveness of company’s internal control.

(1)A significant deficiency is a control deficiency or combination of control deficiency in internal control, such that there is is reasonable possibility that material misstatement will not be prevented, or detected or corrected, on a timely basis. Control activity for granting credit to customer was inadequate. In particular credit department did not perform an adequate check or control over creditworthiness of the customer with outside agency.

(2)A material weakness is a deficiency or a combination of deficiency in internal control, such that there is a reasonable possibility that material misstatement of the entity’s financial statement will not be prevented or detected on a timely basis.

When there is no appropriate physical safeguard over company’s inventories and when there is no adequate safeguard to prevent employees from stealing high value inventory parts, constitute material deficiency.

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