Case 3.7 – Foamex International Inc.
1. The management has the final responsibility for the integrity of internal controls. The client prepares the financial statements and the management makes certain claims or assertions about these numbers. The auditor's validate the management's assertions by identifying audit objectives, which are the auditor's version of assertions on the financial statements. The auditors are hired by the audit committee, which is comprised of key members with financial expertise and not the management. The audit committee relies on the management to run the daily operations of the business, and maintain quality and integrity of the accounting and reporting practices, internal controls, and financial statements. The management is also responsible for legal and regulatory compliance, the auditors’ qualifications and independence, and the performance of the company’s internal audit function and independent auditors. The audit committee is responsible for the oversight of all of the above management responsibilities. Other responsibilities of the audit committee include:
a. Overseeing the financial reporting and disclosure process.
b. Monitoring choice of accounting policies and principles.
c. Overseeing hiring, performance and independence of the external auditors.
d. Oversight of regulatory compliance, ethics, and whistleblower hotlines.
e. Monitoring the internal control process.
f. Overseeing the performance of the internal audit function.
g. Discussing risk management policies and practices with management.
2. The auditor's responsibility is to communicate significant deficiencies and material weaknesses that exist regardless of management's decisions. These significant and material deficiencies should be communicated to the management in writing. In the case of non-public companies, the auditors are not required to report separately on internal controls by the PCAOB. Thus, the auditors’ responsibility for a non-public company is to focus on fraud within the audit.
a. Overseeing the financial reporting and disclosure process.
b. Monitoring choice of accounting policies and principles.
c. Overseeing hiring, performance and independence of the external auditors.
d. Oversight of regulatory compliance, ethics, and whistleblower hotlines.
e. Monitoring the internal control process.
f. Overseeing the performance of the internal audit function.
g. Discussing risk management policies and practices with management.
2. The auditor's responsibility is to communicate significant deficiencies and material weaknesses that exist regardless of management's decisions. These significant and material deficiencies should be communicated to the management in writing. In the case of non-public companies, the auditors are not required to report separately on internal controls by the PCAOB. Thus, the auditors’ responsibility for a non-public company is to focus on fraud within the audit.