7-36
a. Based only on these facts, the combination of these significant deficiencies represents a
material weakness for the following reasons: Individually, these deficiencies were
evaluated as representing a reasonably possible likelihood that a misstatement that is
significant but not material could occur. However, each of these significant
deficiencies affects the same set of accounts. Taken together, these significant
deficiencies represent a reasonable possibility that a material misstatement could occur
and not be prevented or detected. Therefore, in combination, these significant deficiencies
represent a material weakness.
b. Based only on these facts, the auditor should determine that the combination of these
significant deficiencies represents a material weakness for the following reasons:
 The balances of the loan accounts affected by these significant deficiencies have
increased over the past year and are expected to increase in the future.
 This growth in loan balances, coupled with the combined effect of the significant
deficiencies described, results in a reasonably possible likelihood that a material
misstatement of the allowance for credit losses or interest income could occur.
Therefore, in combination, these deficiencies meet the definition of a material weakness.
7-37
a. If the lack of an adequate antifraud program is considered a material deficiency by the
auditor because of increased risk, then the auditor should issue an adverse opinion.
However, if it is only considered to be a significant deficiency, then an unqualified
report can be issued.
b. An unqualified report should be issued as no control deficiencies were identified.
c. Because the auditor identified a material misstatement in the financial statements, an
adverse report on Fritz’s ICFR would very likely be issued.
d. The auditor must determine the magnitude of the possible misstatement of nonroutine
sales. If it is determined to be material then an adverse opinion should be issued.
However, if materiality is not a concern, an unqualified opinion may be given.
e. Most likely an adverse opinion would be issued, unless the risk of compliance
violations was not material.
7-40
a. As long as the auditor agrees with company’s assessment of controls, an unqualified
report can be issued. However, AS 5 indicates that controls must operate for a
sufficient time period to accommodate management and auditor testing. This does
not appear to be possible in the scenario when the changes were made after
management’s assessment. The auditor should explicitly disclaim any opinion with
respect to the information about corrective actions and plans to implement new
controls as disclosed by management.
b. The auditor should issue an adverse opinion if he or she does not believe sufficient
time has passed to gather sufficient, competent evidence that the control deficiencies
have been corrected.