AS 12 Accounting for Government Grants

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PCAOB Auditing Standard no.4
Reporting on Whether a Previously Reported
Material Weakness Continues to Exist
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Applicability

• This standard establishes requirements and
  provides direction that apply when an auditor is
  engaged to report on whether a previously
  reported material weakness in internal control
  over financial reporting continues to exist as of
  a date specified by management.
• This standard is effective from February 6 ,
  2006.

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• An auditor may conduct an engagement to report on
  whether a previously reported material weakness
  continues to exist if
• The auditor has audited the companys financial
  statements and internal control over financial
  reporting in accordance with Auditing Standard
  No.5, An Audit of Internal Control Over Financial
  Reporting That Is Integrated with An Audit of
  Financial Statements, as of the date of the
  companys most recent annual assessment of
  internal control over financial reporting
• The auditor may report on more than one
  previously reported material weakness as part of
  a single engagement.

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Revised Definitions of significant deficiency and
material weakness according to PCAOB 5

• A significant deficiency is a control
  deficiency, or combination of control
  deficiencies, in an internal control over
  financial reporting, that is less severe than a
  material weakness , yet important enough to merit
  attention by those responsible for the oversight
  of the companys financial reporting.

• A material weakness is defined as a deficiency
  or a combination of deficiencies , in an internal
  control over financial reporting, such that there
  is reasonable possibility that a material
  misstatement of companys annual or interim
  financial statements will not be prevented or
  detected on timely basis.

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Objectives

• The auditors objective in an engagement to
  report on whether a previously reported material
  weakness continues to exist is to obtain
  reasonable assurance about whether the previously
  reported material weakness exists as of a date
  specified by management and to express an opinion
  thereon.
• To obtain reasonable assurance, the auditor
  should obtain and evaluate evidence about whether
  specified controls were designed and operated
  effectively as of the date specified by
  management and whether those controls satisfy the
  companys stated control objectives.

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Conditions for Engagement Performance

• The auditor may report on whether a previously
  reported material weakness continues to exist at
  a company only if all of the following conditions
  are met
• Management accepts responsibility for the
  effectiveness of internal control over financial
  reporting
• Management evaluates the effectiveness of the
  specific controls
• Management asserts that the specific controls
  identified is effective in achieving the stated
  control objectives
• Management supports its assertion with sufficient
  evidence, including documentation and
• Management presents a written report that will
  accompany the auditors report that contains all
  the elements according to tis standard.

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Examples of Control Objectives and Related
Assertions
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Applying the Standards of the PCABOB

• The auditor must adhere to the standards of the
  PCAOB in performing an engagement to report on
  whether a previously reported material weakness
  continues to exist. Adherence to the standards
  involves
• Planning the engagement,
• Obtaining an understanding of internal control
  over financial reporting,
• Testing and evaluating whether a material
  weakness continues to exist, including using the
  work of others, and
• Forming an opinion on whether a previously
  reported material weakness continues to exist.

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• The auditing procedures herein involves a process
  of gathering, updating and analyzing information.
• The engagement must be performed by a person or
  persons having adequate technical training and
  proficiency as an auditor.
• The auditor should properly plan the engagement
  to report and should properly supervise
  assistants.
• To perform this engagement, the auditor must have
  a sufficient knowledge of the company and its
  internal control over financial reporting.
• The auditor must obtain an understanding of and
  evaluate managements evidence supporting its
  assertion.

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Forming an opinion on Whether a Previously
Reported Material Weakness Continues to Exist.

• Management may conclude that a previously
  reported material weakness no longer exists
  because it has been reduced to a significant
  deficiency. If management does not plan to
  correct the significant deficiency within a
  reasonable time, the auditor should evaluate
  whether the remaining significant deficiency
  could be indicative of a material weakness in
  internal control over financial reporting.

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• While forming this opinion, the auditor should
  evaluate all evidence obtained from all sources.
• The auditor may issue an opinion on whether a
  previously reported material weakness continues
  to exist only when there have been no
  restrictions on the scope of auditors work.

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Requirements for Written representations

• In an engagement to report, the auditor should
  obtain following representations
• Acknowledging, managements responsibility for
  establishing and maintaining effective internal
  control over financial reporting.
• Stating that management has evaluated the
  effectiveness of the specified controls using the
  specified control criteria and managements
  stated control objectives.

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• Stating managements assertion that the specified
  controls are effective in achieving the stated
  control objectives as of a specified date.
• Stating managements assertion that the
  identified material weakness no longer exists as
  of the same specified date.
• Stating that management believes that its
  assertions are supported by sufficient evidence.

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• The written representations should be signed by
  those members of management with overall
  responsibility for the companys internal control
  over financial reporting.
• The failure to obtain written representations
  from management, including managements refusal
  to furnish them, constitutes a limitation on the
  scope of the engagement.

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Auditors Report

• The auditors report on whether a previously
  reported material weakness continues to exist
  must include the following elements
• A title that includes the word independent
• A description of the material weakness
• A statement that the auditor has previously
  audited and reported on managements annual
  assessment of internal control over financial
  reporting as of a specified date

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• An identification of the management report that
  includes managements assertion, such as
  identifying the title of the report (if the
  report is titled)
• A statement that management is responsible for
  its assertion
• An identification of the specific controls that
  management asserts address the material weakness

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• A statement that the engagement was conducted in
  accordance with PCAOB Standards
• A statement that the auditor believes auditing
  procedures provide a reasonable basis for his or
  her opinion
• The manual or printed signature of the auditors
  firm
• The date of the auditors report

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• A paragraph stating that, because of its inherent
  limitations, internal control over financial
  reporting may not prevent or detect
  misstatements
• The city and state from which the auditor's
  report has been issued, and
• A statement that the auditors responsibility is
  to express an opinion on whether the material
  weakness continues to exist as of the date of
  managements assertion based on his or her
  auditing procedures.

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• The auditor may report on more than one
  previously reported material weakness as part of
  the same engagement.
• The form of the auditors report resulting from
  an engagement to report on whether a previously
  reported material weakness continues to exist may
  be an opinion on whether a material weakness
  continues to exist, or it may be in the form of a
  disclaimer of opinion. A qualified opinion is not
  permitted.
• Subsequent events A change in internal control
  over financial reporting or other factors that
  might significantly affect the effectiveness of
  the identified controls or the achievements of
  the companys stated control objectives might
  occur subsequent to the date of managements
  assertion but before the date of the auditors
  report. The auditor should obtain written
  representations from management regarding such
  matters.

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Report Modifications

• The auditor should modify the standard report if
  any of the following conditions exists
• Other material weaknesses that were reported
  previously by the company as part of the
  companys annual assessment of internal control
  are not addressed by the auditors opinion
• A significant subsequent event has occurred since
  the date being reported on
• Managements report on whether a material
  weakness continues to exist includes additional
  information.

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Thank You