Enhance Formal Communication

SAS 115

Com. 530

SAS 115

Memorandum: New Auditing Standards SAS 115

Subject: SAS 115

Good morning,

This is in regards to new auditing procedures and standards set forth by The Auditing Standards Board in October 2008. The Auditing Standards Board issued a Statement on Auditing Standards Number 115 (SAS 115). These new standards will have a definite impact on how audits are being conducted, and certain reporting requirements. These new standards go into effect starting with financial periods ending in December of 2009. So what that means for us, it goes into effect immediately. SAS 115 identifies the following three concepts:

1. Defines three categories of deficiencies that may appear during an external audit

1. Control deficiencies
2. Significant deficiencies
3. Material Weaknesses

1. It provides guidance on evaluating the severity of the deficiencies identified
2. Requires the auditor to communicate in writing to management and those in charge with governance any significant deficiencies or material weaknesses. (www.controller.berkeley.edu)

In addition to requirement that all auditors are to provide written communication to all managers and leaders within the organization, SAS 115 could also be a basis of research for all users. “This future research should examine not only the potential usefulness of internal control opinions (Turner, Mock, Coram and Gray).” These examinations could also help the leaders of these companies to create greater controls to prevent future deficiencies.

        According to the new standard the way control deficiencies are also being reviewed and revised. SAS 115 states that, “control deficiency was revised to indicate that a control must be designed and operated to enable management to correct misstatements, as well as to prevent and detect them (Ryan).” Due to the fact that SAS 115 requires that an auditor provide this feedback to the leaders, we must all be precise with our data, and clearly communicate these corporate flaws to management. The reports also, “must have a thoughtful, appropriately documented analysis of the cause and effect of the deficiency (Ryan).” This being said, it mandatory that each mistake is clearly stated to management, with all required pieces of evidence. Failure to provide this key step could have serious consequences.

        Once the company audit has been complete, problems clearly identified, documented and communicated to management, you as the auditor have the ability to provide feedback to the organization on creating new internal controls, or creating recommendations to prevent future incidents. “Recommendations may include a request that the auditor submit a copy of an auditor-completed disclosure checklist and a account-grouping schedule along with a draft of statements, or a suggestion that staff attend an auditor or third party education program (Ryan)” So a successful audit, not only involves identifying and communicating potential deficiencies, but it also provides the organization tools to help in preventing reoccurring issues.

        So as you continue your prescribed tasks, take some time to review the attached memo’s and power point slide. As an auditor, SAS 115 will affect us in our daily work.  Please familiarize yourself with the information contained in this memo, and please contact your supervisor with any questions.

Date: 21st October 2010

Subject: A memorandum on SAS 115 rules and the impact of the new rules

The SAS 115 was issued by the Auditing Standards Board (ASB) to replace the old standard known as SAS 112, as a result of the need to replace the old control deficiencies with new control designs. This took effect from December 15, 2009. The new standard SAS 115 explained explicitly some terms that would be useful tools for the auditor as well as the management to detect and correct any misstatements of reports and prevent them from reoccurring. These terms are deficiency in control, significant deficiency, and material weakness.

The SAS 115 defined deficiency in control as a deficiency which exists when the design or operation of a control does not allow management or employees, in the normal course of performing assigned functions, to prevent or detect and correct misstatements on a timely basis. It also defined significant deficiency as a deficiency or combination of deficiencies in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance. And finally it defined  material weakness as a deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis (Gavin T. A. Sep/Oct 2009) (24) (5) p.29.

This new standard will help to increase the professional judgment of auditors, to enable them define and note down in their audit report the different deficiencies or weaknesses found within the company. Secondly it will guide auditors in evaluating the seriousness or severity of the deficiencies identified. Thirdly it will guide the auditors on how to report in writing the significant deficiencies or weaknesses discovered to management and some key players in the company.

In conclusion, the new standard will help auditors communicate better in a timely manner to the clients, significant deficiencies observed in order to promote consistency and good practices in the company. This will help the company to reduce weaknesses identified in the control system to further reduce damages it might cause the company. If there are comments or questions on this please do not hesitate to contact me.

Power Point Slides

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October 16, 2010

Memorandum: SAS 115 Implementation and communication concerns.

Hello Sir,

As you know, the Auditing Standards Board recently issued SAS 115 which supersedes SAS 112. Upon the creation of SAS 115, several challenges and changes will arise from its implementation.  These changes will directly affect communication between our organizations auditors and clients. The organizations internal controls regarding financial statements will have to be changed as a result of SAS 115. These changes are likely to cause confusion among the staff if they are not clearly defined. Several groups within the organization will be affected. Auditors will be primarily affected and they must be encouraged to use their judgment as well as their calculation abilities. Avoiding misstatements will still be a major focus but now control deficiencies need to be taken into account as well.