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Material Weakness

[muh-TEER-ee-uhl WEEK-nis]

What is the definition of Material Weakness?
A significant deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected on a timely basis.
Using Material Weakness in an Example

A company failed to reconcile its bank statements with its recorded cash balances regularly, which led to undetected errors in financial reporting. This oversight was identified as a material weakness because it increased the risk of material misstatements in the financial statements.

Using Material Weakness in a sentence

During the audit, we identified a material weakness in our client's process for financial closing, which could potentially lead to significant reporting errors if not addressed.

Related Terms

MD&A

Management Discussion and Analysis (MD&A) is a section required by the Securities and Exchange Commission (SEC) in financial reporting that provides an explanation by management of significant changes in operations, assets, and liquidity.
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Macroeconomics

The branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product, and inflation.
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Management

Management refers to the group of individuals who make decisions, create policies, and provide the supervision necessary to implement the owner's business objectives and ensure the organization's stability and growth.
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Management Accounting

A branch of accounting designed to provide financial and non-financial information to help management in making decisions, planning, and controlling organizational activities. Also known as managerial accounting.
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Management Discussion and Analysis (MD&A)

A section required by the SEC in financial reporting where management provides an explanation of significant changes in operations, assets, and liquidity, highlighting the company's performance and future outlook.
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Management's Report

A report included in a company's annual report, where management provides its assessment of the effectiveness of the company's internal control over financial reporting, alongside the audited financial statements for the most recent fiscal year.
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Managerial Accounting

A branch of accounting focused on providing financial information and analyses to managers within organizations to assist in decision-making, planning, and control.
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Manipulation

The act of buying or selling securities to create a false appearance of active trading, with the intent to influence other investors to buy or sell shares, which is considered illegal.
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Manufacture

To make or process a product, typically on a large scale using machinery.
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Manufacturing Overhead

Manufacturing overhead, also known as factory overhead costs, includes all indirect costs associated with the production process of a company. This includes costs related to the operation and maintenance of the production facilities, excluding direct materials and direct labor.
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Margin

In finance, margin refers to the difference between the market value of securities and the loan amount provided by the broker to purchase these securities. It also represents the excess of selling price over the unit cost in trading contexts, and in derivatives trading, it is the cash collateral deposited to cover potential losses.
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Margin of Profit

The ratio or percentage that represents the relationship of gross profits to net sales, indicating the profitability of a company's sales.
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Marginal Cost

The increase or decrease in the total costs of a business as a result of producing one additional or one fewer unit of output.
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Marginal Tax Rate

The percentage of tax applied to an individual's or entity's income for each additional dollar of income.
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Mark-to-Market

A method of valuing assets that involves adjusting the carrying amount of an asset to reflect its current market value.
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Markdown

The amount subtracted from the selling price of securities when they are sold to a dealer in the over-the-counter (OTC) market, often reflecting a reduced price necessary to facilitate the sale.
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Market

A venue, physical or virtual, where goods, services, or financial instruments are exchanged between buyers and sellers. In finance, it often specifically refers to the equity market, where stocks are traded.
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Market Capitalization

The total value of a corporation as determined by the market price of its issued and outstanding common stock.
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Market Index

A market index is a statistical measure that represents the value of a section of the stock market through the weighted average of the prices of selected stocks.
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Market Interest Rate

The prevailing rate of interest available in the market for securities of similar risk and maturity.
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Market Price

The last reported price at which a security was sold on an exchange.
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Market Share

The percentage of total sales or revenue generated by a company or product within a specific industry or market, compared to the total sales or revenue of that industry or market.
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Market Value

The price at which an asset would trade in a competitive auction setting, often used to refer to the current price of a stock or bond on the open market.
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Marketable Securities

Financial instruments, such as stocks or bonds, that can be easily bought or sold on public exchanges or over-the-counter markets due to their high liquidity and active trading.
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Marketing

The process of promoting, selling, and distributing a product or service, which includes market research and advertising to move goods and services from the provider to the consumer.
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Markup

The amount added to the cost price of goods to cover overhead and profit, resulting in the final selling price.
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Married Taxpayers

Taxpayers who are married and may choose to file a joint tax return, combining their income and expenses. A married status applies if individuals are living as husband and wife, recognized in a common law marriage, or are legally married but separated (not legally divorced), as determined on the last day of the tax year.
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Matching Principle

A fundamental accounting concept that mandates expenses to be matched with the revenues they help generate within the same accounting period, or over the periods that benefit from the expenditure. This principle ensures that each period's earnings are accurately reported by correlating costs with their related revenues.
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Material

In accounting, material refers to information or an amount that could influence the decision-making of users of financial statements. An item is considered material if its omission or misstatement could impact the economic decisions of users taken on the basis of the financial statements.
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Materiality

The significance of an omission or misstatement of accounting information that, in the context of surrounding circumstances, could influence the judgment of a reasonable person relying on the information.
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Materials Inventory Account

An inventory account that records the value of raw materials, parts, and supplies held by a company at any given time, which are used in the production process or for maintenance and repairs.
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Maturity

The date on which the principal amount of a financial instrument, such as a bond or loan, is due to be paid in full, or the date an agreement such as an interest rate swap ceases to accrue interest.
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Maturity Date

The date on which the principal amount of a financial instrument, such as a note, draft, bond, or other debt instrument, becomes due and payable.
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Merchandise

Items that can be bought or sold, including all movable goods such as cars, textiles, and appliances.
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Merchandise Inventory

The goods that are currently on hand and available for sale to customers in the regular course of business operations.
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Merger

A business combination in which one entity directly acquires the assets and liabilities of one or more entities, resulting in a unified company. This process may involve the absorption of all assets and liabilities by the buyer without the creation of a new entity.
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Microeconomic Pricing Model

An accounting model based on the principle that maximum profit is achieved when the difference between total revenue and total cost is maximized, aligning with basic microeconomic theories of profit maximization.
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Microeconomics

The branch of economics that studies the behavior and decision-making processes of individual economic units, including households, companies, and industries, focusing on the mechanisms of supply and demand and the allocation of resources.
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Mixed Costs

Mixed costs are expenses that contain both variable and fixed cost elements, making them partially dependent on the level of activity and partially constant, regardless of activity levels.
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Modeling

The process of creating a mathematical representation of an economic or financial system to study and predict the effects of various changes.
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Modified Accelerated Cost Recovery System

A mandatory system of depreciation for income tax purposes in the United States, established by Congress in 1986, which allows for the accelerated depreciation of property under specific rules and schedules.
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Monetary Items

Assets and liabilities that have a fixed or determinable money value, typically stated in currency units such as dollars, which are not subject to inflation or deflation adjustments.
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Money Laundering

The process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to be earned legally. It typically involves three steps: placement, layering, and integration.
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Money Market

A financial market specifically for trading short-term debt instruments, typically with high liquidity and short maturities.
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Monopoly

Control of the production and distribution of a product or service by a single firm or a group of firms acting in concert, often resulting in the exclusion of other competitors and potentially leading to higher prices and reduced innovation.
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Mortgage

A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan with the condition that the conveyance of the title becomes void upon the payment of the debt.
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Moving Average

A moving average is a statistical calculation used to analyze data points by creating a series of averages of different subsets of the full data set. It is commonly used in financial markets to smooth out short-term fluctuations and highlight longer-term trends in data.
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Moving Average Method

A method used in accounting to calculate the average cost of inventory on a perpetual basis, which adjusts after each inventory purchase by averaging the costs of the current inventory and any new purchases.
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Municipal Bond

A bond issued by a government or public body, where the interest income received by investors is generally exempt from federal taxes.
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Mutual Agency

The principle whereby each partner in a partnership is empowered to act as an agent of the partnership, thereby binding all other partners and the partnership itself to the actions taken and agreements made in the course of business operations.
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Mutual Fund

An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities, managed by a professional fund manager.
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