CHAPTER 1: INTERNAL CONTROLS
Irregularities, in audit terms, can fall into the following three categories.
1. Reportable Condition: A reportable condition is an internal control with a deficiency in the design or implementation that is deemed significant enough to adversely impact the reliability and accuracy of the control activity. Several reportable conditions together can result in a material weakness. 2. Significant Deficiency or Finding: A deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. It is a deficiency that adversely affects the company’s ability to initiate, record, process, or report external financial data reliably in accordance with government financial standards. It could be a single deficiency or a combination of deficiencies that result in the likelihood that a misstatement of financial statements that is not inconsequential in amount will not be prevented or detected. 3. Material Weakness: A material weakness is a condition in which the design or operation of an internal control does not reduce, to an acceptable level, the risk of an error or irregularity from occurring in an organization’s financial reporting. There is not a hard and fast, quantifiable rule regarding what constitutes a material weakness since it depends on the size and complexity of the organization. However, auditors generally consider there to be a material weakness when the lack of an internal control leads to deficient financial reporting that would cause a reader of the financial reports to draw a different conclusion than if the control worked properly. It is an “adverse opinion”—a red flag based on the auditor’s conclusion – that a company’s financial statements inaccurately reflect the actual financial standing based on government regulations and accounting standards. In the case of a reportable condition, significant deficiency or finding, or material weakness, it may be necessary to implement a compensating control until a solution can be designed, tested, and implemented. It is important to make a note in the P&P as to why a compensating control was initiated and when the actual solution will be implemented. Caveat: Internal controls do not provide an absolute assurance that an organization’s financial reporting will be error-free. Organizations do their best to design and implement their internal control systems to achieve their goals and minimize financial reporting risks. The effectiveness of their design is dependent on internal and external resources and general macro events not controlled by the organization.
1.9 Fraud
Fraud is a big business, so prevention should be on everyone’s mind. It is hard to keep up with the inventiveness of the fraudsters, and as more and more processes and communications are moved online the risks seem to not only keep pace but to increase in variation and creativity. An organization can become a victim of fraud committed by those within the organization or those outside of the organization—and sometimes by a combination in the form of collusion between an employee and an outsider.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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