Changes in Audit Communications
Governmental Advisor, March 2007  

Changes in the auditing world continue. The American Institute of Certified Public Accountants’ (AICPA) Audit Standards Board recently released new auditing rules (Statement on Auditing Standards Number 112 referred to as “SAS 112”) effective this year that will result in changes in the communications you receive from your auditors. These new rules require auditors to more formally communicate matters we note about your accounting procedures and internal controls. While we have always provided our observations in these areas as part of our audit, we will likely be telling you about more items than we have in the past.

SAS 112 introduces new terminology called a “significant deficiency” that replaces what used to be labeled a “reportable condition.” We are now required to inform you about any “deficiencies” we observe in your accounting procedures or internal controls that are “significant.” The new threshold for “significant deficiency” is much lower than the threshold was for a “reportable condition” — a significant deficiency is any flaw that creates more than a remote risk of error in your financial statements that could matter to someone who uses those statements. The requirements of SAS 112 go so far as to classify certain journal entries proposed by your auditor as a “significant deficiency.” This is a substantial change from past practice and prior auditing requirements.

We are now also required to communicate these matters to more people, and at a minimum under these new rules, we are required to communicate these matters in writing to management and all individuals involved in governance.

Finally, while it will be up to you to determine what, if any, actions you elect to take to correct any deficiencies we bring to your attention, we will be obligated to continue to reference uncorrected deficiencies in our future audits.