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You are the senior manager or audit engagement partner on Care For Kids Inc., a not-for- profit organization that has a December 31 year-end.

While performing year-end substantive procedures, the engagement team identified an error in the entitys year-end adjusting entries. Care For Kids Inc. had inadvertently not recorded an unrealized gain of $5 million in one of its many investment portfolios. The investments total approximately $200 million. Through inquiry of client management, the engagement team learned that the accounting department had not reviewed the brokers statement for this particular portfolio. The portfolio, which consisted of traded securities, had increased in market value by $5 million. Materiality for the audit was $10 million.

As part of the audit, you must assess the operating effectiveness of controls related to the misstatement under audit standards established by the AICPA.

Required:

What factors would you consider to determine if a deficiency, significant deficiency, or material weakness exists? Be specific to this situation.

What, if any, communications would you be required to make to those charged with governance?

What effect would the materiality of this oversight have on your assessment of this control weakness?

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