$7-37$ For each of the following cases, indicate why management and the auditors deter$-$

mined that the control deficiency was a material weakness.

Case $1$: In our assessment of the effectiveness of internal control over finan$-$

cial reporting as of December $31,2021,$ we identified a material weakness over the

accounting for and disclosure of derivatives associated with warrant instruments pri$-$

marily because we lacked technical expertise and adequate procedures to develop

and document our common stock warrant analysis on the applicability of ASC

$815$ "Derivatives and Hedging$-$Contracts in Entity's Own Equity" to our warrant

Chapter $7$ Auditing Internal Control over Financial Reporting

instruments. Because of the lack of technical expertise and adequate procedures to

develop and document our analysis of the applicability of ASC $815,$ which was char$-$

acterized as a material weakness with regard to accounting for warrants, manage$-$

ment has concluded that we did not maintain effective internal control over financial

reporting as of December $31,2021,$ based on the criteria in Internal Control$-$

Integrated Framework.

Case $2$: In the course of making our assessment of the effectiveness of internal

control over financial reporting, we identified a material weakness in our internal

control over financial reporting. The preparation and review process for the calcula$-$

tion of the tax provision was inadequate, which led to errors in the computation of

deferred tax assets and related income tax benefit.

Case $3$: Management identified a material weakness in First Bank Company's

system of internal control over financial reporting with respect to ensuring the

appropriate calculation of its allowance for loan losses. Specifically, during a pro$-$

cess enhancement to the model that calculates the allowance for loan losses, the

quarterly average loss rate was not annualized due to a computational error. Control

procedures in place for reviewing the quantitative model for calculating the allow$-$

ance for loan losses did not identify this error in a timely manner, and, as such, the

company did not have adequately designed procedures.