Update Regarding Newly Issued Statement
of Auditing Standard 112

By Lori Hetrick

Malin, Bergquist and Company, LLP

Management of nonprofit organizations should be familiar with their entity’s internal control process over financial statement reporting for the following reasons:  1) lessens the potential for fraudulent activities relating to the safeguarding of assets; 2) effectiveness and efficiency of operations; and 3) compliance with applicable laws and regulations, especially regarding Federal and State Grant requirements.

Nonprofit organizations should be aware of the recently issued Statement of Auditing Standard (SAS) 112 – Communicating Internal Control Related Matters Identified in an Audit which supersedes SAS 60 – Communication of Internal Control Related Matters Noted in an Audit. 

Those charged with governance, or those who oversee and assume responsibility for the financial reporting and footnote disclosures, of nonprofit organizations may be familiar with the “Communication of Reportable Conditions to Management and the Audit Committee or Its Equivalent” report when an audit of financial statements is conducted.

The new changes consist of enhancing the guidance on evaluating significant deficiencies, previously referred to as reportable conditions, as well as changing the verbiage in the SAS 60 report.  A significant deficiency is defined as “a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected.” 

A control deficiency is defined as “the design or operation of a control that does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.”  A material weakness is defined as “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.”

For more information, please refer to AICPA Statement on Auditing Standard 112 or contact a representative from Malin, Bergquist & Company at 412.364.9395.

Reprinted from Duquesne University's Non-Profit Leadership Institute E-Newsletter - February 2007