KPMG issued an audit opinion stating that Wells Fargo’s internal controls over financial reporting were operating effectively as of December 31, 2014. Had KPMG known about the alleged sales practices before they issued their audit opinion on internal control over financial reporting for the 2014 fiscal period, how might that knowledge impact their audit opinion?

Question

What will be an ideal response?

Answer 1

Given the relatively immaterial amount of unauthorized service and fee revenues recorded in the financial
statements for 2014, knowledge about the alleged sales practices would have no impact on KPMG’s
opinion on internal controls over financial reporting as of December 31, 2014. In fact, KPMG did
have knowledge of these practices when their audit opinion on internal control over financial reporting
was issued (see the letter from Lynne Doughtie that is in Appendix 1 to this solution). The amounts
involved were negligible in relation to the consolidated financial statements, and the deficiencies would
most likely not be deemed to create a reasonable possibility that material misstatements would not
be prevented or detected. Also, the alleged activities involved a relatively small number of lower-level
employees (5,300 out of 270,000 employees) mostly located in Southern California. The fraud did not appear to involve members of senior management, and as a result, there did not appear to be an over-
arching deficiency related to tone at the top or internal control as a whole.