What You Need to Know About SAS 112

August 2007

Summary of SAS 102 to 112

There have been recent changes in auditing standards which will affect the way we conduct your year end audit.  The American Institute of Certified Public Accountants (AICPA) Standards Board issued Statement on Auditing Standards (SAS) No. 112, Communicating Internal Control Related Matters Identified in an Audit in 2006.  The new SAS No. 112 supersedes SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit. 

SAS No. 112 establishes new standards and provides guidance on auditors’ responsibilities for identifying, evaluating, and communicating matters related to internal controls over financial reporting that are identified during the audit of an organization’s financial statements.

Changes required by SAS No. 112 include:

• Terminology used in management letters will change, and there will likely be an increase in the number of items we are required to communicate.
• Management letters are required to be provided in writing to both management and those charged with governance, which includes an audit or finance committee or the board of directors.
• We are required to continue to communicate significant deficiencies and material weaknesses from prior year audits that have not been remediated.

SAS No. 112 introduces new definitions for control deficiencies, significant deficiencies and material weaknesses, and eliminates the term reportable condition.  The result of these changes is likely to be an increase in the number of deficiencies communicated in writing.

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect financial statement misstatements on a timely basis.

A significant deficiency is 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 (GAAP) 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.  The term significant deficiency replaces reportable condition, which was used in previous audits.

A material weakness is 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.

Please note that SAS No. 112 specifically identifies matters that show a strong indication of material weakness.  Some examples of these matters include:

• Identification by the auditor of a material misstatement in the financial statements (this includes significant auditor proposed adjusting journal entries).
• Restatement of previously issued financial statements to reflect the correction of a material misstatement.
• Ineffective controls over the preparation of financial statements.
• Failure by management or those charged with governance to assess the effect of a significant deficiency previously communicated to them and either correct or conclude that it will not be corrected.

In the interim, we encourage you to begin thinking about the key processes and controls within your organization, the amount of existing documentation (i.e. written accounting policies and procedures), training, and the steps that might be taken to improve the control environment.