STAFF QUESTIONS & ANSWERS
Auditing Standard No. 2 – Internal Control
June 23, 2004
(Revised July 27, 2004)
Page 8
an adverse opinion on management's assessment but render an unqualified opinion on
the effectiveness of internal control over financial reporting?
A8. No. Paragraph 20 of Auditing Standard No. 2 describes the
responsibilities that management is required to fulfill for the auditor to
satisfactorily complete an audit of internal control over financial reporting. These
responsibilities include management evaluating the effectiveness of the
company's internal control over financial reporting and supporting its evaluation
with sufficient evidence, including documentation. If the auditor concludes that
management has not fulfilled these responsibilities, Auditing Standard No. 2
states that the auditor should communicate, in writing, to management and the
audit committee that the audit of internal control over financial reporting cannot
be satisfactorily completed and that he or she is required to disclaim an opinion.
Therefore, an auditor could not render either an adverse opinion on
management's assessment or an unqualified opinion on internal control over
financial reporting because, in this situation, the auditor would be precluded from
expressing any opinion.
Additionally, management is required to fulfill these responsibilities under Items
308(a) and (c) of Regulation S-B and S-K, 17 C.F.R. 228.308 (a) and (c) and
229.308 (a) and (c), respectively. To the extent that management has willfully
decided not to fulfill these responsibilities, the auditor also may have
responsibilities under AU sec. 317, Illegal Acts by Clients,
2/
and Section 10A of
the Securities Exchange Act of 1934.
Q9. Is it necessary for the auditor to test controls directly if management asserts that
internal control over financial reporting is ineffective? If the auditor identifies a material
weakness, does the auditor need to complete his or her testing of controls?
2/
The Board adopted the generally accepted auditing standards, as
described in the AICPA Auditing Standards Board's ("ASB") Statement on Auditing
Standards No. 95, Generally Accepted Auditing Standards, as in existence on April 16,
2003, on an initial, transitional basis. The Statements on Auditing Standards
promulgated by the ASB have been codified into the AICPA Professional Standards,
Volume 1, as AU sections 100 through 900. References in Auditing Standard No. 2 and
this Staff Questions and Answers document refer to those generally accepted auditing
standards, as adopted on an interim basis in PCAOB Rule 3200T.