Statement on Auditing Standards, No. 115 - Communicating Internal Control Related Matters Identified in an Audit (SAS 115)

Before the enactment of the Sarbanes-Oxley Act (SOX), a 2002 United States federal law, the American Institute of Certified Public Accountants (AICPA) was the standard setter for audits of both public and nonpublic companies. The Public Company Accounting Oversight Board (PCAOB), a non-profit corporation created by SOX, was established in 2002 to oversee the auditors of public companies. After its creation, PCAOB began issuing audit standards for audits of public companies. AICPA decided to change its auditing standards for nonpublic companies to conform to the PCAOB standards.

In 2007, PCAOB issued Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements to supersede Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, which changed the definitions of the various kinds of deficiencies in internal control. In an effort to align definitions with the PCAOB Auditing Standard No.5, AICPA issued SAS 115, Communicating Internal Control Related Matters Identified in an Audit, to supersede SAS 112 of the same title in October 2008. The new standard is effective for audits of financial statements for periods ending on or after December 15, 2009 and AICPA permits earlier implementation.

SAS 115 contains the following revised definitions of the terms material weakness and significant deficiency:

"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."

"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."

SAS 115 revises the list of deficiencies in internal control that are indicators of material weaknesses to consist of:

• identification of fraud, whether or not material, on the part of senior management;
• restatement of previously issued financial statements to reflect the correction of a material misstatement due to error or fraud;
• identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity's internal control;
• and ineffective oversight of the entity's financial reporting and internal control by those charged with governance.

Furthermore, SAS 115 excludes a list of deficiencies that ordinarily would be considered at least significant deficiencies, which was included in SAS 112. This exclusion is believed to leave more room for auditors' professional judgment in identifying significant deficiencies. Finally, SAS 115 contains a revised illustrative written communication to management and those charged with governance of material weaknesses and significant deficiencies.

If you have questions about this information please contact your relationship manager, or Yigit Uctum at (608) 274-4020 or yigit.uctum@wegnercpas.com. .