8. 39. For each of the following independent cases, state the highest level of deficiency that you believe the circumstances represent: a control deficiency, a significant deficiency, or a material weakness. Explain your decision in each case. The company processes a significant number of routine intercompany transactions. Individual intercompany transactions are not material and primarily relate to balance sheet activity-for example, cash transfers between business units to finance normal operations. A formal management policy requires monthly reconciliation of intercompany accounts and confirmation of balances between business units. However, there is not a process in place to ensure performance of these procedures. As a result, detailed reconciliations of intercompany accounts are not performed on a timely basis. Management does perform monthly procedures to investigate cose2 cose3 the satidant shipping tarim. The change in the standard shilvis g margiat on a monithly bases the reawiobleness af imventofy. levels at the end of each acentereriately fecarded in advunce: of stipuent, but amceants thay not been miseral but ules personsel frce the contract. Sales personoel frequently acouinting degartment. These ancorts are deducted accusints by cusecters in paying their inverees andare recordod as ousitite are individially insighific the ageregate and have occurred consistendly over the past fow years. The company has found it ecceesary to rectate its financial stacemeats foc the gas no years due. year. Membens of manageneat indicatad that the minaaaments ose won't let it tappen arrain. Asume the ame facts exist as in Case 5 exceps that you, the aodinc, hare Merified the acknowledgol that the misstatements occurred becasise they simply ditn't know the rules at the time, and now they know the rules. Management, withis the last kix months of the year upler audit. hired a new financial accountinge expert and belicies thet the cosinel seakmess a misstalement could occur again with the new expert zerieming these matiens. Assume the same facts exist as in Case 6. except that maagemsto bes informed the chief. financial officer that she must watch over these mamets much more carefully. She has attended scvenl CPE courses on accounting and seems to be caught up in the area in which the wisstatenents occurred. Subsequent to year-end, the avditon have deternined taat they believe that management has understated its warranty obligations. The auditors know that, according to the Professional Standaris, they should consider the difference between management s estimate and the closeut reasonable estimate as "likely misstatemest. "The chief financial o\$icer (CFO) has argasd that this amount is teasonable. Yet, in fact, neither the anditons not the CrO knows which amount is right. The CFO is ander no panticular pressure to mect an earnings fotecast: he just thinks that the warnunty obligations for tmany of the jroducts will expire and will not be exercised Still, the CFO can't convince the auditors: Likewise, the agditors can' convince the CFO of their position. The CFO finally agrees to a material adjestuent to get to the auditots amount and "keep the peace