Task due 01-04

words 2000-2100
ABC Retailers — Internal Controls
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.