Definition of a Material Weakness:According to auditing standards, a material weakness in internal control over financial reporting is a deficiency or combination of deficiencies that creates a reasonable possibility of a material misstatement in the financial statements that will not be prevented or detected on a timely basis.
Key Characteristics of a Material Weakness:
Reasonable Possibility:The likelihood of a misstatement is more than remote but less than certain.
Material Misstatement:The error or omission could impact the decisions of users relying on the financial statements.
Timely Detection:The deficiency allows errors to go undetected for an extended period, potentially affecting financial statement reliability.
Why Other Options Are Incorrect:
A.A misstatement in the basic financial statements may result from a material weakness, but the definition focuses on the reasonable possibility, not the actual result.
B.A material weakness impacts the financial statements, not "other accompanying financial information."
C.While timely detection is part of the issue, the definition focuses on the reasonable possibility of a misstatement, not management’s inability to perform specific duties.
References and Documents:
GAAS (AICPA SAS No. 115):Provides the formal definition of material weaknesses and guidance for auditors in evaluating control deficiencies.
COSO Framework:Emphasizes the need for effective internal controls to mitigate material misstatement risks.
