How would knowledge of the alleged sales practices shed insights about the effectiveness of internal controls over financial reporting?

Question

What will be an ideal response?

Answer 1

Information related to the alleged sales practices most directly relates to the control environment
component of internal controls over financial reporting. PCAOB AS 2110 “Identifying and Assessing
Risks of Material Misstatement,” notes that the auditor should obtain an understanding of the company’s
control environment. That standard notes that obtaining an understanding of the control environment
includes assessing the following:
? Whether management’s philosophy and operating style promote effective internal control over
financial reporting
? Whether sound integrity and ethical values, particularly of top management, are developed and
understood; and
? Whether the board or audit committee understands and exercises oversight responsibility over
financial reporting and internal control.
The alleged deceptive sales practices used by employees reflect a lack of integrity and ethical values,
which would be important to the auditor’s consideration of the control environment component of
internal control.
AS 2110 also describes how the auditor should obtain an understanding of the control
activities components of internal control. Control activities represent actions established by policies
and procedures to help ensure that management directives to mitigate risks to the achievement of
objectives are carried out. The systems at Wells Fargo failed to prevent employees from activating new
accounts and services without customer authorization and documented approval. Employees were able
to create fictitious accounts with fake PIN numbers and other authentications due to limitations in
the Wells Fargo systems. The failure to prevent these kinds of actions suggests deficiencies may have
existed in control activities surrounding the creation of new accounts and services for customers.