Memo for Statement on Auditors Standards No. 115

The Auditing Standards Board (ASB) issued Statement on Auditing Standards No. 115 (SAS 115), Communicating Internal Control Related Matters Identified in an Audit, in October 2008. It is effective for periods ending after Dec. 15, 2009, and permits earlier application. The new standard amends and replaces SAS 112, which was effective for periods ending after Dec. 15, 2006. The reason there was so little time between the issuance of the two pronouncements is because the ASB wanted the definitions of control deficiency, significant deficiency, and material weakness as contained in SAS 112 to conform to those in PCAOB Auditing Standard No. 5, which went into effect for audits of fiscal years ending on or after Nov. 15, 2007.

Under the new standard, 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, as SAS 112 required. The definition of material weakness also includes the term “correct,” and has deleted the phrase “more than a remote likelihood” and replaced it with the “reasonably possible” language of FASB 5. The definition of significant deficiency was revised, removing the phrases “more than a remote likelihood” and “more than inconsequential,” and adding that a deficiency is significant if it is “less severe than a material weakness, yet important enough to merit attention by those charged with governance.”

When an auditor evaluates whether an uncorrected misstatement independently identified by the auditor is a deficiency, the fact that the client did not correct the misstatement is compelling evidence that a control may be deficient or nonexistent. Each control matter must have a thoughtful, appropriately documented analysis of the cause and effect of the deficiency. The focus of the standard is clearly on whether the design and operation of a control permits management to prevent, detect, and correct misstatements in a timely manner....