Case Scenario:
Medco Hospital Buyers Group (MHBG) processes a significant number of intercompany transactions each month, mainly transferring cash between business units to meet the needs of operating cash flows.None of MHBG's intercompany transactions are material on an individual basis. The intercompany transactions only affect balance sheet accounts.
Company policy calls for intercompany accounts to be reconciled each month and for the balances between business units to be confirmed; however, the policy is not followed. The reconciliations are not performed regularly, and when they are performed, not in a timely manner.
Management reviews the financial reports of the various business units and follows up on any large amounts in the intercompany accounts. Management also reviews the operating expenses of each of the business units each month, using variances as an indicator of reasonableness. Management consistently investigates any large intercompany account balances and unusual or large variances that are identified in this monthly review. (Adapted from AS 2, D1, Scenario A)
Do you believe the lack of monthly intercompany account reconciliation and confirmation at MHBG is an ICFR deficiency? If you think it is, is it a significant deficiency or a material weakness, and why?