Discussing Control Weakness on the UFE

You’ll more than likely encounter control weaknesses at some point during the UFE and you’ll have to probably discuss at least 4-5 of them to get the C in this assurance indicator. Here’s the WIR (weakness, implication and recommendation) strategy most students will probably use to tackle control weaknesses. As always, I caution that this is just a strategy and not always applicable so use your judgment in determining when this is appropriate and inappropriate to apply.

Weakness

Here you are answering, using case facts, what the specific control weakness is. You can include this as part of a longer paragraph covering off everything or I prefer to keep everything separate and just use “Weakness: … ” so it’s even more clear and keeps you on track.

Examples of a weaknesses:

  • Presently the finance department is overworked and there are insufficient segregation of duties since the same individuals are creating POs, entering information into the accounting system and preparing the cheque runs.
  • The transposition error for the receivable contract of $1.5M was not caught despite managements insistence that this would normally be caught by a manager’s review.

Implication

The implication answers the “so what?” This is equally as important as identifying the weakness, you must state what will continue to go wrong if this weakness is not resolved. Think about the Financial Statements or the business itself. Will amounts be misstated? Will the business lose cash? Will fraud occur? And so forth.

Examples of an implication:

  • The lack of segregation of duties is inappropriate since it does not separate accounting entry from payment and can result in finance staff making inappropriate accounting entries (for example payments to themselves) and then issuing the cheques to themselves with no oversight. Fraud could occur without being detected in time to prevent it.
  • It is possible that there are other (possibily material) errors due to similar oversights by management review. Managers are presently being overworked and unable to keep up with their duties resulting in a lack of functioning controls such as this review. This can result in misstatements due to errors not being caught by management review.

Recommendation

The recommendation is your suggested solution to this problem. This must be a control that is specific and practical given the circumstances and of course must be related to the simulation risk and implication discussed.

Examples of a recommendation:

  • Hiring a new controlled ASAP should be given priority in order to set up proper segregation of duties and have proper oversight. Presently, management review is too late and merely a detective control and not preventative.
  • For the time being, managers should be spoken to regarding the importance of reviewing these forms and held accountable for their oversights. Longer-term, CompanyX should assess whether they should hire additional staff in order to allow the manager to focus on reviewing such forms appropriately since the cost of errors may outweigh the savings in management reductions.

 

Now altogether, what an actual response might look like:

Segregation of Duties

Weakness: Presently the finance department is overworked and there are insufficient segregation of duties since the same individuals are creating POs, entering information into the accounting system and preparing the cheque runs.
Implication:  The lack of segregation of duties is inappropriate since it does not separate accounting entry from payment and can result in finance staff making inappropriate accounting entries (for example payments to themselves) and then issuing the cheques to themselves with no oversight. Fraud could occur without being detected in time to prevent it.
Recommendation:  Hiring a new controlled ASAP should be given priority in order to set up proper segregation of duties and have proper oversight. Presently, management review is too late and merely a detective control and not preventative.

Oversight Problems

Weakness: The transposition error for the receivable contract of $1.5M was not caught despite managements insistence that this would normally be caught by a manager’s review.
Implication: It is possible that there are other (possibily material) errors due to similar oversights by management review. Managers are presently being overworked and unable to keep up with their duties resulting in a lack of functioning controls such as this review. This can result in misstatements due to errors not being caught by management review.
Recommendation: For the time being, managers should be spoken to regarding the importance of reviewing these forms and held accountable for their oversights. Longer-term, CompanyX should assess whether they should hire additional staff in order to allow the manager to focus on reviewing such forms appropriately since the cost of errors may outweigh the savings in management reductions.

As you can see, each is 4-5 sentences in total and covers off everything neatly. I’m sure the wordsmiths out there can even get them shorter and more direct.

Do you have any trouble discussing Control Weaknesses? What’s the worst part about these?

 

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