What does significant deficiency mean on the CPA exam?
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. One can exist even though no misstatement was found.
Defined against AU-C 265.07, .A6.
Which CPA exam sections use significant deficiency?
Significant deficiency appears in the AUD section of the CPA exam.
What is the difference between significant deficiency and material weakness?
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
- 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.
- reasonable possibility: More than remote.
Related terms
- 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.
- significant risk: A risk of material misstatement that warrants special audit attention because of its likelihood or its size.
- internal audit: An in-house function that evaluates controls and processes and reports to those charged with governance.
- senior management: The people who direct and control the entity day to day, as distinct from those charged with governance, whose job is to oversee them.
- those charged with governance: The people responsible for overseeing the entity's strategic direction and its accountability, including the financial reporting process.
- assessed risk: The auditor's judgment about the risk of material misstatement at the assertion level, combining inherent and control risk.