Big4Guy

In one of my previous posts, I discussed the concept of material weakness and how it affects internal controls over financial reporting. Depending upon the seriousness of a control deficiency identified, th sam e might result in a significant deficiency or material weakness. Material weaknesses do have a negative impact on internal controls over financial reporting and on external auditors opinion on financial statements. A material weakness results in a loss of investor confidence in the company. However, there are many steps management can take to remedy this.

Suppose a material weakness is identified by the management or the auditor. In such a case, the management can take steps to compensate for the material weakness in the financial statement preperation process. This is because, it is ultimately the management which is responsible for preperation and of complete and accurate financial statements. So how does management remediate material weaknesses? A couple of simple things management can do to compensate material weaknesses is expand the scope of testing, lay stress on areas of weakness or even adopt a different approach for testing. All said and done, if the auditor concludes that that management has taken adequate steps to remediate or compensate material weaknesses, and the financial statements are fairly stated, the auditor might even issue an unqulaified report. Thus, a company may get a clean financial report despite having reported a material weakness.

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