Suggested responses to the case questions are provided below.

1. (LO1) List the three levels of internal control deficiencies, rank them in terms of severity, and explain the criteria, as defined in the appropriate audit standard, for each level.

The three levels of internal control deficiencies, in order of lowest to highest severity, are deficiency, significant deficiency, and material weakness. These terms are defined in Appendix A of PCAOB Auditing Standard (AS) 2201 (Public Company Accounting Oversight Board (PCAOB) 2023).

AS 2201 provides some guidance for determining whether an internal control deficiency (or a combination of deficiencies) is a material weakness. For example, paragraph 65 lists factors that affect whether there is a reasonable possibility that a misstatement will result from a deficiency (e.g., the nature of the accounts or assertions or susceptibility of an account to fraud). Paragraph 69 lists four indicators that a control deficiency is...

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