Question: Sorrell, CPA, is auditing the financial statements
Sorrell, CPA, is auditing the financial statements of Van Dyke as of December 31, 2017. Sorrell’s substantive procedures and other tests indicated that Van Dyke’s financial statements were prepared in accordance with generally accepted accounting principles and, accordingly, Sorrell expressed an unqualified opinion on those financial statements. Because Van Dyke’s securities are registered with the Securities and Exchange Commission, Van Dyke is subject to the reporting requirements of AS 2201. During its assessment of internal control over financial reporting, Van Dyke’s management identified material weaknesses related to (1) the method of accounting for sales commissions and (2) separation of duties related to purchase transactions. Sorrell was able to gather sufficient evidence and did not encounter limitations with respect to the evaluation of Van Dyke’s internal control over financial reporting. Sorrell prepared the following draft report on Van Dyke’s internal control over financial reporting:
Required:
Identify the deficiencies in the audit report drafted by Sorrell. Group the deficiencies by paragraph and in the order in which they appear. Do not rewrite the report. Cite the relevant sections from the professional standards.
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Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Van Dyke: We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Van Dyke has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COso criterial. Van Dyke's management is responsible for assessing the effectiveness of intermal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounfing principles. A company's internal control over financial reporting indudes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company. (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Two material weaknesses were identified in the design and operation of internal contros over the accounting for sales commissions and separation of duties related to purchases of inventory. Given the nature of the transactions and processes involved and the potential for a misstatement to occur as a result of the internal control deficiencies existing on December 31, 2017, we have concluded that there is more than a remote likelihood that a material misstatement in the annual or interim financial statements would not have been prevented or detected by internal controls. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 financial statements. In addition to the material weaknesses noted above, we identified several deficiencies in internal control over financial reporting that we deemed to be less significant than a material weakness. These deficiencies have been separately communicated to Van Dyke's management. In our opinion, because Van Dyke has not maintained an effective internal control over financial reporting, we are unable to evaluate management's assessment that Van Dyke did not maintain effective internal control over financial reporting as of December 31, 2017. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Van Dyke has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the Coso criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Van Dyke as of December 31, 2017 and 2016, and related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017. Sorrell, CPA December 31, 2017
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