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Auditor's Responsibility <br />• The auditor must - <br />• Evaluate identified control deficiencies and determine whether those deficiencies, <br />individually or in combination, are significant deficiencies or material <br />weaknesses <br />• Communicate, in writing, significant deficiencies and material weaknesses to <br />management and those charged with governance <br />• Includes items communicated in prior audits but not yet remediated <br />During an audit of financial statements, the auditor is not required to perform <br />procedures to identify control deficiencies <br />- However, during the course of the audit, the auditor may become aware of <br />deficiencies in the design or operation of the entity's internal control <br />Identifying Control Deficiencies <br />A control deficiency exists when the design or operation of a control does not allow <br />management or employees, in the normal course of performing their assigned <br />functions, to prevent or detect misstatements on a timely basis <br />- Design deficiency <br />• Control is missing <br />• Not properly designed <br />- Operating deficiency <br />• Control does not operate properly <br />• Person performing control lacks authority or qualifications <br />New Terminology <br />• Significant Deficiency - a control deficiency, or combination of control deficiencies, <br />that adversely affects the entity's ability to initiate, authorize, record, process, or <br />report financial data reliably in accordance with GAAP such that there is more than a <br />remote likelihood that a misstatement of the entity's financial statements that is mare <br />than inconsequential will not be prevented or detected <br />• Material Weakness - a significant deficiency, or combination of significant <br />deficiencies, that results in more than a remote likelihood that a material misstatement <br />of the entity's financial statements will not be prevented or detected <br />Note -The term reportable condition is no longer used <br />Key Factors to Consider <br />• The significance of a deficiency in internal control depends on the potential for <br />misstatement in the financial statements being audited, not just on whether a <br />misstatement has actually occurred <br />• Auditor needs to assess - <br />- Likelihood <br />- Extent <br />• Inconsequential -the actual or potential misstatement would clearly be immaterial to <br />the financial statements <br />• Mare than Inconsequential -the actual or potential misstatement is less than material <br />but more than inconsequential <br />