Material Weakness


DEFINITION of 'Material Weakness'

When one or more of a company's internal controls, put in place to prevent significant financial statement irregularities, is considered to be ineffective. If a deficiency in an internal control is thought to be of material weakness, this means that it could lead to a material misstatement in a company's financial statements.

BREAKING DOWN 'Material Weakness'

A material weakness, when reported by an auditor, simply suggests that a misstatement could occur. If a material weakness remains undetected and unresolved, a material misstatement could eventually occur in a company's financial statements, which would have a tangible effect on a company's valuation. For example, a $100 million overstatement in revenue would be a material misstatement for a company generating sales of $500 million annually.

  1. Audit

    An unbiased examination and evaluation of the financial statements ...
  2. Walk-Through Test

    A procedure used during an audit of an entity's accounting system ...
  3. Internal Audit

    The examination, monitoring and analysis of activities related ...
  4. Material News

    News released by a company that might affect the value of its ...
  5. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  6. Financial Accounting Standards ...

    A seven-member independent board consisting of accounting professionals ...
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