Material weaknesses 1970
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Thanks for that Wrightlot. I’m inclined to agree with you.%0A I have tried to focus on what else is done in regards to financial reports in order to compensate any control deficiency identified, such as CFO review at final stage etc…%0AI am also wondering at what threshold is the materiality set for material weaknesses. Training I received when in the Big 4 points to 4 or 5% of PBT as the rule of thumb, but management here has questioned whether or not Profit after Tax can also be used if there is a tax credit available to increase the materiality.
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I do know of those that have applied 5% of PAT, as well as 5% of PBT, 0.5% of assets and even a combination of these. All I can suggest is that:%0A1. You tell your external auditors your definition of materiality to ensure that they have no material concerns%0A2. Find out what your external auditor’s materiality threshold is so that you are comfortable that if you apply a higher threshold there is no risk that they may uncover something that you descoped (we compared ours and found them to be slightly different so we ensured that we have covered everything they have deemed to be in scope).
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Thanks.
We have coverd this in regard to scoping, but have a year-end adjustment which may have arisen due to an ineffective control in one area.
We are just trying to determine whether it is a signficant deficiency of a material weakness before we issue our 20-F. We are a self-assessment FPI for 2006 so we were hoping to determine our own conclusion prior to issuing our controls deficiencies log to the auditors for review.
It may be that it is just something to discuss with our auditors once they have received the report.
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but have a year-end adjustment which may have arisen due to an ineffective control in one area.
Some questions to consider.
- Who identified the item requiring adjustment, management or the auditors? If the former one could argue that this arose from your own control processes.
- How material is the adjustment?
- Is it genuinely an erroneous transaction/entry or is it a matter of judgement? Adjustments arising from matters of judgement do not (necessarily) constitute a control deficiency
- Can it be justified as a one-off incident? Again not all errors necessarily consitute a control deficiency.
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Denis,%0A I am afraid that it was unfortunately identified by our auditors, and I wouldconfirm it as a control deficiency as the corresponding control that we had in place was found to be ineffective a few days later by ourselves (this is why I don’t think it can be taken as a matter of judgement or once -off).%0AWith our FPI expemtion from auditor attestation, they took to testing controls before us, and received priority from the Finance department%0A Silly mistake that was based on a lack of confirmation of customer collection from third party warehouse location . It was not not chased up by sales dept (due to Christmas holiday rush). %0AThe adjustment is definitely material at 5% PBT level, but only significant when taken at 5% PAT level due to tax credits. Reviews for the potential of a higher misstatement have determined that this is the only misstatement.
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I think you could argue that as the auditors were testing ahead of you - and presumably they understood that this was the case - that your own control processes would have (and in fact did by the sounds of things) picked up the error.
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I don’t know that I agree with Denis. It sounds like your control failed. You may or may not have have caught the failure as part of your SOX testing. I guess that I do not see SOX testing as part of controls over financial reporting.
Given the magnitude, this is certainly a significant deficiency and maybe a material weakness. Does your external auditor have a point of view on this? Did your original SOX scoping identify bright lines for significant and material controls weaknesses? We use EPS for our guidelines. If you do that, then you will benefit from your net tax credits increasing your limits. Just make certain that you tax-effect the error when measuring it.
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I read it slightly differently - goes to show how this stuff can be subjective - in that I thought EMM was saying that their testing uncovered an error which was material (albeit the auditors found it first) which to me is not necessarily a control deficiency. After all we do design controls to pick up errors.
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To Clarify:
Our controls testing over cut off proved to be ineffective because it did not identify goods for collection as opposed to shipment. It was not anticipated, because it was never communicated to us prior to year-end that customers would ever have items for collection.
Therefore, i do not see that we have any argument against our ext auditors’ findings.
I am hoping to discuss the definition of materiality with them towards the end of the week when our final reports are to be submitted to them.
Due to the lack of auditor attestation this year, they have made no effort whatsoever to liase with me in regards to any of their findings. The Audit Director has a tendency not to disclose items until final reporting date even on a normal basis (which I find infuriating because it does not allow us to provide evidence of compensating controls).
This issue was disclosed to me by the CFO. At this stage, I don’t even know what else they may have identified.
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I agree with your statement Denis that we do design controls to pick up errors. The fact that the SOX testing picked up the error is not what I would consider a control, however, and would require remdiation and re-testing to satisfy SOX requirements. Not that this makes EMM’s predicament any better.
EMM, is the control a regular ‘BAU’ control or a one off year-end control? If the later I believe you still have time to remediate as I believe year-end controls can be remediated after year-end cut off if actioned appropriately before the accounts are finalised. I also concur with the comments above that the fact the auditors tested before you did is irrelevant (in fact I would have taken them to task myself as they should really only be testing controls once I had tested them so that they can establish the effectiveness of my testing and decide what reliance they can place on it for their own comfort).
I also understand completely your frustration with your auditor. The firms seem to have struggled to comprehend the need for a different approach when dealing with SOX (eg regular formal updates) as opposed to their normal approach to the external audit of just waiting until the very end and dumping everuything in your lap.
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Wrightlot.
The control is a BAU (systems billed but not shipped and shipped but not billed report reviews) and herein lies the weakness - the item was not picked up by the system as the stock was left for collection in a third party expeditor warehouse.
Whilst we could argue that as sales are ex-works, there is little else we can do here to monitor such collections, but Finance have accepted the error as an adjustment to our financial statements, which leaves us wth very little legroom.
Upon immediate identification, finance performed a full manual cut -off assessment and intend to do so each qtr for the current year ( in the hope that this prevents such errors being identified by the auditors before it can be remediated).
For now - I don’t think there is much we can do.