Transcript SAS 114 THE AUDITORS COMMUNICATION WITH THOSE …

SAS 114
THE AUDITORS COMMUNICATION WITH
THOSE CHARGED WITH GOVERNANCE
Michael Moreland & Kathryn Beseau
Partners
Moreland & Associates, Inc.
STATEMENTS ON AUDITING STANDARDS
(SAS’S)
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
Issued by the AICPA

Apply to all industries

Deal with the way an audit is conducted, not
accounting issues
EFFECTIVE DATE AND APPLICABILITY
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 Effective for periods beginning on or after December
15, 2006
 Applicable to communications in relation to an audit
of financial statements
DEFINITION
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Those with the Power of Governance means the
persons with responsibility for overseeing the strategic
direction of the entity and obligations related to the
accountability of the entity. This includes overseeing
the financial reporting process.
ANOTHER DEFINITION
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Management means the persons responsible for
achieving the objectives of the entity and who have the
authority to establish policies and make decisions by
which objectives are to be pursued. Management is
responsible for the financial statements, including
designing, implementing, and maintaining effective
internal control over financial reporting.
IDENTIFYING THOSE CHARGED WITH
GOVERNANCE
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 When those charged with governance is a collective
responsibility, a subgroup, such as an audit
committee or even an individual, may be charged
with specific tasks to assist the governing body in
meeting its responsibilities.
 When those charged with governance are not clearly
identifiable, agreement must be reached.
COMMUNICATING WITH SUBGROUPS
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 Consider the responsibilities of the subgroup and the
governing body
 The nature of the matters to be communicated
 Whether there is also a need to communicate the
information to the governing body
PURPOSE OF COMMUNICATION
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 Communicate the responsibilities of the auditor
in relation to the financial statement audit (an
overview of the scope and timing of the audit)
 Obtain information relevant to the audit
 Provide timely observations arising from the
audit that are relevant to their responsibility in
overseeing the financial reporting process
 Communicate in writing, significant findings
COMMUNICATING AUDITOR
RESPONSIBILITIES
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Matters communicated may include:
1. How the auditor proposes to address significant
risks due to fraud or error
2. The auditor’s approach relating to internal
control
3. The concept of materiality
4. The extent of reliance on an internal audit effort
QUALIFICATIONS OF THOSE CHARGED
WITH GOVERNANCE
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Requirements to be on the City Council:
1. Residency
2. Age
3. Receive the most votes
(not the ability to oversee the financial reporting
process)
INEFFECTIVE OVERSIGHT
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Ineffective oversight is an indicator of a control
deficiency that should be regarded as at least a
significant deficiency and a strong indicator of a
material weakness in internal control.
LACK OF TWO-WAY COMMUCICATIONS
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If the auditor believes the two-way communication is
inadequate, he should consider:

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Modifying the auditor’s opinion of the basis of a
scope limitation
Obtaining legal advice about the consequences of
different courses of action
Withdrawing from the engagement
HELP IS ON THE WAY
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 An article in the November issue of Western City
Magazine
 Part of January’s New Mayors and Council
Members Academy program offered by the League
of California Cities
 CCMA has recommended that finance directors
learn about this requirement before their City
Council members
IS MORE NEEDED?
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 The League program was for 45 minutes. This was
not enough time.
 Most Mayors and City Council members will not be
interested.
 A separate stand-alone program should be offered by
the League for those who have interest.
 What are your thoughts?