The Effects of SAS No. 115
Presented by
YOUR NAME
THE DATE
Objectives
• For you to gain an understanding of a new
audit standard affecting your audit
engagement and the specific impacts and
potential outcomes that result from this
standard
Why A New Standard?
• As with SAS No. 112, the accounting profession
believes the new SAS No. 115 may:
– Heighten your awareness, as a business owner or
someone charged with organizational governance, of
internal control over financial reporting
– Better enable you to assess your internal control
needs and determine the costs and benefits of
implementing any new controls to help minimize the
risks of financial statement misstatements, including
fraud
What is SAS No. 115?
• Statement on Auditing Standards (SAS)
No. 115, Communication of Internal
Control Related Matters Identified in an
Audit
– Supersedes SAS No. 112 by the same name
– Provides new definitions of the terms material
weaknesses and significant deficiencies
– Provides guidance as to how to evaluate
whether a deficiency in internal controls is a
significant deficiency or materials weakness
Components of SAS No. 115
• As with SAS No. 112, as your auditor we
must evaluate identified control
deficiencies
– Then determine whether those deficiencies,
individually or in combination, are significant
deficiencies or material weaknesses
Components of SAS No. 115
• We must communicate, in writing,
significant deficiencies and material
weaknesses to management and those
charged with governance
– This communication includes significant
deficiencies and material weaknesses
identified and communicated to management
and those charged with governance in prior
audits but not yet remediated
Definitions
• Deficiency in Internal Control - A deficiency in internal
control 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 misstatements on a timely basis:
– A deficiency in design exists when (a) a control necessary to
meet the control objective is missing or (b) an existing control is
not properly designed so that, even if it operates as designed,
the control objective would not be met
– A deficiency in operation exists when (a) a properly designed
control does not operate as designed or (b) when the person
performing the control does not possess the necessary authority
or competence to perform the control effectively
Definitions
• Material Weakness - A material
weakness is 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
Definitions
• Significant Deficiency A significant
deficiency is a deficiency, or a
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
Examples of Control Deficiencies
• Examples of circumstances that may be
control deficiencies, significant
deficiencies, or material weaknesses
include:
– Inadequate design of internal control over the
preparation of the financial statements being
audited
– Employees or management who lack the
qualifications and training to fulfill their
assigned functions
Examples of Control Deficiencies
– Inadequate design of information technology
(IT) general and application controls
– Inadequate documentation of the components
of internal control
– Inadequate design of monitoring controls that
assess the design and operating effectiveness
of the entity’s internal control over time
– Inadequate design of internal control over a
significant account or process
Examples of Control Deficiencies
– Insufficient control consciousness within the
organization, for example, the tone at the top
and the control environment
– Absent or inadequate segregation of duties
within a significant account or process
– Absent or inadequate controls over the
safeguarding of assets
• This applies to controls that the auditor determines
would be necessary for effective internal control
over financial reporting
An Illustrative Example - #1
• You have requested that we perform the
functions necessary to prepare your
financial statements since you do not have
the resources with the adequate
knowledge to prepare your organization’s
financial statements according to generally
accepted accounting principles
An Illustrative Example - #2
• Your controller asks the auditor to calculate
the year-end depreciation adjustment and
gain or loss on sale adjustment
– The adjustment is a material adjustment
– The controller does not have the skill to
determine the adjustment
An Illustrative Example - #3
• Your bookkeeper, who maintains the
company’s general ledger, is unable to record
the investments and related investment
activity because he does not understand the
broker’s statement
Evaluating the Illustrations
• These illustrations may be control deficiencies
• We will then determine whether they are a significant
deficiency or a material weakness based upon:
– The magnitude of the potential misstatement resulting from the
deficiency or deficiencies; and
– Whether there is a reasonable possibility that the entity’s
controls will fail to prevent, or detect and correct a misstatement
• These are only some of the many examples of potential
control deficiencies and are intended to be for illustrative
purposes only and not comprehensive or specific to your
audit
Communicating Deficiencies
• Our consideration of internal control during your
audit is not designed to identify all deficiencies in
internal control that might be significant
deficiencies or material weaknesses
– We are only required to communicate in writing those
control deficiencies we identify during the audit and
determine to be significant deficiencies or material
weaknesses, including those that have been
previously communicated, whether verbally or in
writing, that are not yet remedied
Evaluating Options
• As a result of your audit, you may wish to
have us help you:
– Educate your management team and those
charged with governance on internal controls
as it relates to your organization’s financial
reporting
– Help you understand the costs and benefits of
implementing appropriate controls
– Assist in testing current controls or developing
and implementing appropriate controls
Engagement Scope and Fees
• Because we were already communicating in writing those
control deficiencies we identified during the audit and
determined to be significant deficiencies or material
weaknesses, we do not expect any material changes in
audit fees this year
• However, if there are new control deficiencies or other
issues that arise that affect the scope of the audit, we will
communicate this to you as we become aware of them
Next Steps
• We will complete and deliver the audit
engagement letter to you
• You can determine if there are issues
you’d like to discuss or questions you’d
like to have us address
• We look forward to working with you and
your team on your audit!
Contact Us At Anytime!
• Feel free to contact us with any questions
or assistance you need related to your
audit at:
– Audit Partner/Engagement Contact Name
– Audit Partner/Engagement Contact Phone
Number
– Audit Partner/Engagement Contact Email
Address