A material weakness was identified by management in the company's revenue process. One of the revenue streams for the company did not have sufficient controls, which meant that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, detected, or corrected on a timely basis. There were no known material misstatements in the company's financial statements during the current period.

A root cause analysis determined that management failed to establish control activities over a significant revenue process in Division C. This division was small but growing and had not implemented extensive financial controls to help foster the entrepreneurial nature of the division. Division C grew to a significant portion of the overall organization's revenue during the year, but sufficient controls were never implemented.

A related material weakness was noted in Principle 9, Identifies and Analyzes Significant Change. Management determined there was a deficiency in the system of internal control that led to the material weakness.

Due to the material weaknesses management concluded that:

Principle 10 (Selects and Develops Control Activities) is not present and functioning.

The Control Activities component is not present and functioning.

Principle 9 (Identifies and Analyzes Significant Change) is not present and functioning.

The Risk Assessment component is not present and functioning. Note: the Risk Assessment component template is not included in this scenario, nor is the principle template for Principle 9.

There is a reasonable possibility that a material misstatement of the organization's financial statements would not be prevented, detected, or corrected on a timely basis.

The system of internal control is not effective.