ACCT 417 (Fall 2026) - Chapters 7, 8, and 9 Homework

Overview

Michael Barnes reviews ACCT 417 homework from Chapters 7–9, connecting SOX requirements and ICFR deficiency classifications to audit reporting and control-testing decisions. He explains attribute- and variable-sampling logic, works through control-severity scenarios, and calculates how sample results compare with tolerable deviation rates.

Key takeaways

SOX ICFR evaluation covers both control design and operating effectiveness; auditor improvement recommendations are communicated to management rather than presented as external audit-report recommendations.
A material weakness triggers an adverse ICFR opinion and external disclosure, whereas a significant deficiency is communicated to management and the audit committee but is not itself a material weakness.
For attribute sampling, compare the tolerable deviation rate with the upper population deviation rate, calculated from the sample deviation rate plus the allowance for sampling risk.
A sample with 3 deviations in 50 items has a 6% sample deviation rate; adding 2% sampling-risk allowance yields 8%, which exceeds a 7% tolerance and calls for revising assessed control risk.
Recurring individually small errors can become a material weakness when their aggregate is material and effective compensating controls are absent.
In substantive testing, higher tolerable misstatement reduces sample size, while higher assessed control risk increases sample size because the auditor must lower acceptable detection risk.

Chapters

0:00 Course Logistics and Chapters 7–9 Homework Scope

Michael Barnes asks students to check Brightspace for end-of-semester presentation groups and contact their group members.
The homework review combines Chapters 7, 8, and 9, with material spanning internal controls and audit sampling.

1:40 SOX, ICFR Reporting, and Interim Control Testing

SOX requires management to report on internal control over financial reporting (ICFR); auditors evaluate whether ICFR is properly designed and operating effectively.
Auditor recommendations for improving controls are communicated to management, not included as external recommendations in the audit report.
A control procedure performed by an employee without authorization is an operating deficiency when the control itself has been designed.
Interim testing best suits continuous controls; unusual transactions, period-end controls, and highly subjective controls are less suitable for interim testing.

5:55 ICFR Deficiency Severity, Opinions, and Required Communications

Three deficiencies unlikely to cause material misstatements plus one likely to cause significant but nonmaterial misstatements indicate control deficiencies and a significant deficiency—not a material weakness.
For an ICFR report, a material weakness supports an adverse opinion; a scope limitation may require a disclaimer, while the described absence of a material weakness supports an unqualified opinion.
Auditors communicate all identified control deficiencies in writing to management; significant deficiencies are also communicated to the audit committee.
Material weaknesses are communicated to management and the audit committee and disclosed externally; significant deficiencies alone are not reported to the PCAOB as material weaknesses.

10:49 Attribute Sampling: Sample-Size Drivers and Upper Deviation Rates

Control-test samples use attribute sampling to assess whether a control operates effectively, rather than to determine whether financial statements contain a material misstatement.
Lower confidence levels, higher tolerable deviation rates, and lower expected population deviation rates generally reduce the required sample size.
For a 50-item sample with 3 deviations, the sample deviation rate is 6%; adding a 2% allowance for sampling risk gives an 8% upper deviation rate.
Because 8% exceeds the 7% tolerable deviation rate, the auditor should modify the planned assessed level of control risk.

15:56 Variable Sampling and Substantive-Test Sample Size

Variable sampling estimates a numeric population amount, such as dollar misstatement, by projecting sample findings to the population; attribute sampling instead answers a yes-or-no control question.
Increasing tolerable misstatement reduces the sample size for a substantive test of details because the auditor can accept a larger error.
Increasing assessed control risk raises risk of material misstatement and lowers acceptable detection risk, so the substantive sample size increases.

19:56 Classifying ICFR Deficiencies Through Revenue and Banking Cases

Limited, nonmaterial revenue errors with review controls over unusual contract changes support a significant-deficiency classification rather than a material weakness.
Frequent material contract modifications, ineffective review, and material revenue-recognition errors indicate a material weakness.
Unauthorized discounts that are individually small but recurring and material in aggregate, with no effective corrective control, support a material-weakness conclusion.
At Lawrence Corporation, combined access-control segregation problems, ledger errors, and untimely reconciliations may collectively constitute a material weakness.
At First Coast Bank, significant deficiencies in credit-loss estimates and interest-income controls become more serious when loan balances are growing and further growth is expected.

29:35 Attribute-Sampling Calculations and Control Effectiveness Decisions

Using 95% confidence, a 4% tolerable deviation rate, and a 1% expected rate produces a sample size of 156; the corresponding 5%/2% setup produces 181.
At 90% confidence, the 7%/3% tolerable-and-expected rates produce a sample of 94, while 8%/4% produce 98.
Barnes calculates sample deviation rates including 0 deviations, 5 out of 181 (about 2.8%), and 4 out of 94 (about 4.3%); table-based upper deviation rates are about 2%, 6.9%, 8.7%, and 7.3% across the examples.
Compare the computed upper deviation rate—not just the sample rate—with the tolerable rate: 2% versus 4% and 7.3% versus 8% support effective controls, while 6.9% versus 5% and 8.7% versus 7% do not.

Summary, takeaways, and chapters were generated by AI from the video's transcript and may contain errors. The video belongs to its creator, Michael Barnes.