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Business and Policy Areas
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AICPA Issues SAS 112 on Communicating Internal Control Matters

May 26, 2006

On May 26, the AICPA issued Statement on Auditing Standards (SAS) No. 112, Communicating Internal Control Related Matters Identified in an Audit.  The new SAS 112 supersedes SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit.  The Statement is effective for audits of financial statements for periods ending on or after December 15, 2006 (fiscal 2007 for most higher education institutions).

SAS 112 establishes standards and provides guidance on communicating matters related to an entity’s internal control over financial reporting identified in an audit of financial statements. It is applicable whenever an auditor expresses an opinion on financial statements (including a disclaimer of opinion). In particular, this SAS:

  • defines the terms "significant deficiency" and "material weakness";
  • provides guidance on evaluating the severity of control deficiencies identified in an audit of financial statements; and
  • requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit.

The SAS is considered significant because:

  • terms such as "significant deficiency" and "material weakness" are also in the Public Company Accounting Oversight Board  Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements,  although the definitions in the PCAOB standard are more rigorous; and
  • the standard will be considered by the GAO and likely cause changes in the agency's standards, affecting institutions’ A-133 audits and other areas.

NACUBO and PwC will produce a webcast June 22 to help members understand the standard and begin preparation for implementation.

Staff Resource: Sue Menditto, director, accounting policy.