Video

Vignette 2: Evaluating Root Cause and Severity of a Control Deficiency

Friday, February 17, 2017

Overview

In these vignettes, the audit team’s substantive testing detected an error in a prepaid insurance account; the company didn’t record amortization on a prepaid insurance arrangement. In the first vignette, the partner, the manager and the senior associate are discussing the design of the control over the account, how it was operationalized, and why the control failed to detect the error. As they try to determine the root cause of the error, it becomes clear that additional information is needed before they can reach a conclusion.

Vignette 2(a): Evaluating Controls Over a Pre-Paid Insurance Account

The audit manager, senior associate, and engagement partner discuss how the internal control over the pre-paid insurance account failed to detect a non-material error that was discovered through substantive testing. They are discussing the design of the control over the account and how it was operationalized. As they try to determine the root cause of the error, it becomes clear that additional information is needed before they can reach a conclusion. This video illustrates the decision process that the audit team goes through to determine the root cause of the error.

Vignette 2 (b): Assessing the Severity of the Control Deficiency

After gathering additional information, the manager and senior associate draft a memo that concludes that the control did not operate effectively, but that it did not rise to the level of a material weakness or a significant deficiency. In this second video, the partner walks through the factors that auditors need to consider when evaluating the severity of a control deficiency, even in the absence of a material error to the financial statements.