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ID: 2507308 • Letter: P
Question
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Indicate why management and the auditors determined that control deficiency was a material weakness. Management identified a material weakness in First Bank Company
Indicate why management and the auditors determined that control deficiency was a material weakness. Management identified a material weakness in First Bank Company's system of internal control over financial reporting with respect to ensuring that appropriate calculation of its allowance for loan losses. Specially, during s process enhancement to the model that calculates The allowance for loan losses, the quarterly average loss rate was not annualized due to a computational error. Control procedures in place for reviewing the quantitative model for calculating the allowance for loan losses did not identify this error in a timely manner, and, as such, the company did not have adequately designed procedures.Explanation / Answer
As calculation of allowance for loan losses was found with computational errors which are not annualized but reported as quarterly and is not identified in a timely manner due to inadequate procedures has created deviations from actual correct calculations.It may be considered as small deviation when identified quarterly but when the loss rate was annualized it may have a material effect on the financial statements due to unacceptable deviation.
Hence,management and the auditors determined that control deficiency was a material weakness.