What does material weakness mean on the CPA exam?
Material weakness. A deficiency, or combination of deficiencies, in internal control over financial reporting where there is a reasonable possibility that a material misstatement will not be prevented, or detected and corrected, on a timely basis.
Defined against AU-C 265.07.
Which CPA exam sections use material weakness?
Material weakness appears in the AUD section of the CPA exam.
What is the difference between material weakness and significant deficiency?
Both are deficiencies in internal control OVER FINANCIAL REPORTING and the difference is severity. A material weakness is severe enough that there is a reasonable possibility a material misstatement will not be prevented, or detected and corrected, on a timely basis, where reasonable possibility means more than remote. A significant deficiency is less severe than that yet important enough to merit the attention of those charged with governance. Both go in writing to those charged with governance, including any remediated during the audit, and both also go in writing to management. A deficiency that is neither is still reported to management, in writing or orally, when it merits management’s attention, and an oral communication has to be documented. (AU-C 265.07 and AU-C 265.12)
Other terms defined against AU-C 265
- reasonable possibility: More than remote.
- significant deficiency: A deficiency, or combination of deficiencies, less severe than a material weakness but important enough to merit attention by those charged with governance.
Related terms
- internal control over financial reporting: A process designed to provide reasonable assurance regarding the preparation of reliable financial statements.
- material misstatement: An error or omission in the financial statements large enough, or of a kind, that it could change the decision of a reasonable user relying on them.
- control risk: The risk that the entity's own controls will not prevent, or detect and correct, a material misstatement on a timely basis.
- control environment: The governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity's system of internal control.
- risk assessment procedures: The audit procedures designed and performed to identify and assess the risks of material misstatement at the financial statement and assertion levels.
- accelerated filer: A public company with public float of at least 75 million dollars that has been reporting for at least a year.