Material Weakness Detection Risk

Material weakness detection risk should not be a significant risk due our audit team’s checklist of things to look out for when auditing a client and ACL. When analyzing the material weakness detection risk that our audit team faces, our audit team concludes that the likelihood of a major material weakness not being detected is unlikely due our team’s auditing procedures. To see our audit team’s checklist and auditing procedures, refer to our internal control checklist located in our blog. When plotting material weakness detection risk on a risk map, we can conclude that the likelihood of a major missed material weakness not being detected is not likely going to occur; however, the impact of a major material weakness not being detected could moderately impact SDE’s financial reports. Figure 1A shows the impact and likelihood of material weakness detection risk.

Figure 1A

Material weakness detection risk would be located in the low likelihood and the moderate impact box. 

Material Weakness Detection Using ACL

Temecula Auditors, like many other auditing firms, use Auditing Computing Language (ACL), because ACL is one of the most widely used auditing products for fraud detection and prevention. Not only can our audit team use ACL to detect potential fraud, but also material misstatements and weaknesses. ACL would allow our audit team to view SDE’s numerous accounts and to see if there are any accidental double account transactions that were created. For example, an accountant who is in charge of SDE’s journal entries could have accidently made a double entry of a certain transaction. Auditors analyze payment amounts to test duplicate payments, missing check amounts, and incorrect invoice numbers. Not only can our audit team detect material errors in certain accounts, but can also detect unusual transactions. ACL has many options the auditor can use when trying to discover any unusual material misstatements in accounts. One of the tools that ACL offers is Benford’s Analysis. This allows the auditor to look at an entire account to determine if the account’s numbers fall into an expected distribution. One of the major potential material weaknesses is accidental duplicate accounts with shipped products. Our team will need to look closely to the product transactions, because SDE has been having trouble with over and under shipments of products.

Audit Sampling

Another way that our audit firm can lower the risk of not detecting material weaknesses is by conducting audit sampling. To conduct audit sampling for an account that deals with shipped products, our team will need to follow these standard audit sampling procedures:

1)      Audit less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance.

2)      The auditor needs to be aware of account balances and transactions that may be more likely to contain misstatement.

3)      There are two general approaches to audit sampling: non-statistical and statistical. Both approaches require that the auditor use professional judgment in planning, performing, and evaluating a sample and in relating the audit evidence produced by the sample to other audit evidence when forming a conclusion about the related account balance or class of transactions.

4)      The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

5)      The sufficiency of audit evidence is related to the design and size of an audit sample, among other factors. The size of a sample necessary to provide sufficient audit evidence depends on both the objectives and the efficiency of the sample.

6)      Evaluating the appropriateness of audit evidence is solely a matter of auditing judgment and is not determined by the design and evaluation of an audit sample. In a strict sense, the sample evaluation relates only to the likelihood that existing monetary misstatements or deviations from prescribed controls are proportionately included in the sample, not to the auditor's treatment of such item.¹

Works Cited

¹“Audit Sampling.” AICPA website.

http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments