PCAOB Auditing Standard no.4PCAOB Auditing Standard no.4

Reporting on Whether a Previously Reported Material Weakness Continues to Exist

Applicability This standard establishes requirements and This standard establishes requirements and

provides direction that apply when an auditor is provides direction that apply when an auditor is engaged to report on whether a previously engaged to report on whether a previously reported material weakness in internal control reported material weakness in internal control over financial reporting continues to exist as of over financial reporting continues to exist as of a date specified by management. a date specified by management.

This standard is effective from February 6 , This standard is effective from February 6 , 2006.2006.

An auditor may conduct an engagement to report on whether a previously reported material weakness continues to exist if:

The auditor has audited the company’s financial statements and internal control over financial reporting in accordance with Auditing Standard No.5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, as of the date of the company’s most recent annual assessment of internal control over financial reporting;

The auditor may report on more than one previously reported material weakness as part of a single engagement.

Revised Definitions of significant deficiency and

material weakness according to PCAOB 5

Revised Definitions of significant deficiency and

material weakness according to PCAOB 5

A material weakness is defined as “ a deficiency or a combination of deficiencies , in an internal control over financial reporting, such that there is reasonable possibility that a material misstatement of company’s annual or interim financial statements will not be prevented or detected on timely basis.”

A significant deficiency is a control deficiency, or combination of control deficiencies, in an internal control over financial reporting, that is less severe than a material weakness , yet important enough to merit attention by those responsible for the oversight of the company’s financial reporting.

Objectives The auditor’s objective in an engagement to report The auditor’s objective in an engagement to report

on whether a previously reported material on whether a previously reported material weakness continues to exist is to obtain reasonable weakness continues to exist is to obtain reasonable assurance about whether the previously reported assurance about whether the previously reported material weakness exists as of a date specified by material weakness exists as of a date specified by management and to express an opinion thereon.management and to express an opinion thereon.

To obtain reasonable assurance, the auditor should To obtain reasonable assurance, the auditor should obtain and evaluate evidence about whether obtain and evaluate evidence about whether specified controls were designed and operated specified controls were designed and operated effectively as of the date specified by management effectively as of the date specified by management and whether those controls satisfy the company’s and whether those controls satisfy the company’s stated control objectives.stated control objectives.

Conditions for Engagement Performance

The auditor may report on whether a previously reported material weakness The auditor may report on whether a previously reported material weakness continues to exist at a company only if all of the following conditions are met:continues to exist at a company only if all of the following conditions are met:

Management accepts responsibility for the effectiveness of Management accepts responsibility for the effectiveness of internal control over financial reporting;internal control over financial reporting;

Management evaluates the effectiveness of the specific Management evaluates the effectiveness of the specific controls;controls;

Management asserts that the specific controls identified is Management asserts that the specific controls identified is effective in achieving the stated control objectives;effective in achieving the stated control objectives;

Management supports its assertion with sufficient evidence, Management supports its assertion with sufficient evidence, including documentation; andincluding documentation; and

Management presents a written report that will accompany Management presents a written report that will accompany the auditor’s report that contains all the elements according the auditor’s report that contains all the elements according to tis standard. to tis standard.

Examples of Control Objectives and Related

AssertionsControl Objectives Assertions

Recorded sales of product X initiated on the Company’s Web site are real

Existence or occurrence

Interest rate swaps are recorded at fair value

Valuation

Pending litigation that is reasonably possible to result in a material loss is disclosed in the quarterly and annual financial statements

Presentation and disclosure

The company has legal title to recorded product X inventory in the company’s Dallas, SG Warehouse

Rights and Obligations

Product X warranty losses that are probable and can be reasonably estimated are recorded as of the company’s quarterly financial statement period-ends

Completeness

The auditor must adhere to the standards of The auditor must adhere to the standards of the PCAOB in performing an engagement to the PCAOB in performing an engagement to report on whether a previously reported report on whether a previously reported material weakness continues to exist. material weakness continues to exist. Adherence to the standards involves:Adherence to the standards involves:

Planning the engagement,Planning the engagement,

Obtaining an understanding of internal control over Obtaining an understanding of internal control over financial reporting,financial reporting,

Testing and evaluating whether a material weakness Testing and evaluating whether a material weakness continues to exist, including using the work of others, andcontinues to exist, including using the work of others, and

Forming an opinion on whether a previously reported Forming an opinion on whether a previously reported material weakness continues to exist.material weakness continues to exist.

Applying the Standards of the

PCABOB

The auditing procedures herein involves a The auditing procedures herein involves a process of gathering, updating and analyzing process of gathering, updating and analyzing information.information.

The engagement must be performed by a person The engagement must be performed by a person or persons having adequate technical training or persons having adequate technical training and proficiency as an auditor.and proficiency as an auditor.

The auditor should properly plan the The auditor should properly plan the engagement to report and should properly engagement to report and should properly supervise assistants.supervise assistants.

To perform this engagement, the auditor must To perform this engagement, the auditor must have a sufficient knowledge of the company and have a sufficient knowledge of the company and its internal control over financial reporting.its internal control over financial reporting.

The auditor must obtain an understanding of and The auditor must obtain an understanding of and evaluate management’s evidence supporting its evaluate management’s evidence supporting its assertion.assertion.

Management may conclude that a Management may conclude that a previously reported material weakness previously reported material weakness no longer exists because it has been no longer exists because it has been reduced to a significant deficiency. If reduced to a significant deficiency. If management does not plan to correct the management does not plan to correct the significant deficiency within a reasonable significant deficiency within a reasonable time, the auditor should evaluate time, the auditor should evaluate whether the remaining significant whether the remaining significant deficiency could be indicative of a deficiency could be indicative of a material weakness in internal control material weakness in internal control over financial reporting. over financial reporting.

Forming an opinion on Whether a Previously Reported Material Weakness Continues to Exist.

While forming this opinion, the While forming this opinion, the auditor should evaluate all evidence auditor should evaluate all evidence obtained from all sources.obtained from all sources.

The auditor may issue an opinion on The auditor may issue an opinion on whether a previously reported whether a previously reported material weakness continues to exist material weakness continues to exist only when there have been no only when there have been no restrictions on the scope of auditor’s restrictions on the scope of auditor’s work.work.

In an engagement to report, the auditor In an engagement to report, the auditor should obtain following representations:should obtain following representations:

Acknowledging, management’s Acknowledging, management’s responsibility for establishing and responsibility for establishing and maintaining effective internal control over maintaining effective internal control over financial reporting.financial reporting.

Stating that management has evaluated Stating that management has evaluated the effectiveness of the specified controls the effectiveness of the specified controls using the specified control criteria and using the specified control criteria and management’s stated control objectives.management’s stated control objectives.

Requirements for Written representations

Stating management’s assertion that Stating management’s assertion that the specified controls are effective in the specified controls are effective in achieving the stated control objectives achieving the stated control objectives as of a specified date.as of a specified date.

Stating management’s assertion that Stating management’s assertion that the identified material weakness no the identified material weakness no longer exists as of the same specified longer exists as of the same specified date.date.

Stating that management believes that Stating that management believes that its assertions are supported by its assertions are supported by sufficient evidence.sufficient evidence.

The written representations should be The written representations should be signed by those members of signed by those members of management with overall responsibility management with overall responsibility for the company’s internal control over for the company’s internal control over financial reporting.financial reporting.

The failure to obtain written The failure to obtain written representations from management, representations from management, including management’s refusal to including management’s refusal to furnish them, constitutes a limitation furnish them, constitutes a limitation on the scope of the engagement.on the scope of the engagement.

Auditor’s Report

The auditor’s report on whether a The auditor’s report on whether a previously reported material previously reported material weakness continues to exist must weakness continues to exist must include the following elements:include the following elements:

A title that includes the word A title that includes the word independentindependent;;

A description of the material weakness;A description of the material weakness;

A statement that the auditor has previously audited A statement that the auditor has previously audited and reported on management’s annual assessment of and reported on management’s annual assessment of internal control over financial reporting as of a internal control over financial reporting as of a specified date;specified date;

An identification of the management report An identification of the management report that includes management’s assertion, such that includes management’s assertion, such as identifying the title of the report (if the as identifying the title of the report (if the report is titled);report is titled);

A statement that management is A statement that management is responsible for its assertion;responsible for its assertion;

An identification of the specific controls that An identification of the specific controls that management asserts address the material management asserts address the material weakness;weakness;

A statement that the engagement was A statement that the engagement was conducted in accordance with PCAOB conducted in accordance with PCAOB Standards;Standards;

A statement that the auditor believes A statement that the auditor believes auditing procedures provide a auditing procedures provide a reasonable basis for his or her opinion;reasonable basis for his or her opinion;

The manual or printed signature of the The manual or printed signature of the auditor’s firm;auditor’s firm;

The date of the auditor’s report;The date of the auditor’s report;

A paragraph stating that, because of A paragraph stating that, because of its inherent limitations, internal its inherent limitations, internal control over financial reporting may control over financial reporting may not prevent or detect misstatements;not prevent or detect misstatements;

The city and state from which the The city and state from which the auditor's report has been issued, andauditor's report has been issued, and

A statement that the auditor’s A statement that the auditor’s responsibility is to express an opinion responsibility is to express an opinion on whether the material weakness on whether the material weakness continues to exist as of the date of continues to exist as of the date of management’s assertion based on his management’s assertion based on his or her auditing procedures.or her auditing procedures.

The auditor may report on more than one The auditor may report on more than one previously reported material weakness as part of previously reported material weakness as part of the same engagement.the same engagement.

The form of the auditor’s report resulting from The form of the auditor’s report resulting from an engagement to report on whether a previously an engagement to report on whether a previously reported material weakness continues to exist reported material weakness continues to exist may be an opinion on whether a material may be an opinion on whether a material weakness continues to exist, or it may be in the weakness continues to exist, or it may be in the form of a disclaimer of opinion. A qualified form of a disclaimer of opinion. A qualified opinion is not permitted.opinion is not permitted.

Subsequent eventsSubsequent events: A change in internal control : A change in internal control over financial reporting or other factors that over financial reporting or other factors that might significantly affect the effectiveness of the might significantly affect the effectiveness of the identified controls or the achievements of the identified controls or the achievements of the company’s stated control objectives might occur company’s stated control objectives might occur subsequent to the date of management’s subsequent to the date of management’s assertion but before the date of the auditor’s assertion but before the date of the auditor’s report. The auditor should obtain written report. The auditor should obtain written representations from management regarding representations from management regarding such matters.such matters.

Report Modifications The auditor should modify the standard report The auditor should modify the standard report

if any of the following conditions exists:if any of the following conditions exists:

Other material weaknesses that were reported Other material weaknesses that were reported previously by the company as part of the previously by the company as part of the company’s annual assessment of internal control company’s annual assessment of internal control are not addressed by the auditor’s opinion;are not addressed by the auditor’s opinion;

A significant subsequent event has occurred since A significant subsequent event has occurred since the date being reported on;the date being reported on;

Management’s report on whether a material Management’s report on whether a material weakness continues to exist includes additional weakness continues to exist includes additional information.information.

Thank You