December 10, 2007-- In May 2006, the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards No. 112, Communicating Internal Control Matters Identified in an Audit, effective for audits of financial statements for periods beginning on or after December 15, 2006.

  Specifically, this standard does the following:

• Provides guidance on evaluating the severity of control deficiencies identified in an audit

• Requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit.

This standard introduces new terms, such as, control deficiency, significant deficiency and material weakness, all of which were not used in the superseded SAS 60.  In order for one to understand the new standard, one must know the definitions of these new terms.

• Control Deficiency – When the design or operation of a control does not allow management or employees to prevent or detect misstatements on a timely basis.

• Significant Deficiency – A control deficiency or combination of control deficiencies that adversely affects an entity’s  ability to initiate, authorize, record, process or report financial statement data in accordance with GAAP, such that there is a more than remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.

• Material Weakness – A significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

The end product, as a result of SAS 112, will be a letter to an entity’s management and governing body, which details any significant deficiencies or material weaknesses in internal controls identified during the course of an audit.  While the language and terminology may be different, the goal of the SAS 112 letter is to formally document the auditor’s identifications of a potential risk to an entity’s assets or financial reporting.  The SAS 112 letter documents both the auditor’s responsibility to identify existing deficiencies and management’s acknowledgment of those deficiencies.  The SAS 112 letter gives management the opportunity to address those significant deficiencies and material weaknesses identified within their internal control structure so that the entity’s operating efficiency and effectiveness is secured.

For more information, contact Adam Dabbeekeh in the Accounting and Auditing Department at 215-564-1900.

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