SAS 112

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SAS 112
A GRF PRESENTATION

• Presented by
• James Larson, CPA
• Jeff Freedman

Gelman, Rosenberg Freedman CERTIFIED PUBLIC
ACCOUNTANTS
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Basics of SAS 112

• Implementation Date Audits of financial
  statements after December 15, 2006
• What is a SAS? (Statement on Auditing Standards)
• Who issues SASs?
• What is the authority of SASs?
• What type of entities do SASs cover?

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Basic Requirements of SAS 112

• Main requirements
• Auditor must evaluate identified control
  deficiencies and determine whether they are
  significant deficiencies or material weaknesses
• Auditor must communicate in writing significant
  deficiencies and material weaknesses to
  management and those charged with governance
• Communication includes deficiencies communicated
  in prior audits but not yet remediated

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Why was SAS 112 Issued?

• Closer adherence to Sarbanes-Oxley Act
• Mirrors increased emphasis on internal control in
  SASs 104 through 111 (new audit risk assessment
  standards applicable after December 15, 2007)
• Correct looseness of SAS 60, which was replaced
  by SAS 112
• Convergence with international standards

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What Does SAS 112 Mean to CPA Firms?

• More audit hours and upward pressure on audit
  fees
• Requires increased understanding of and training
  regarding internal controls
• More judgment calls regarding existence of and
  classification of control deficiencies

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What Does SAS 112 Mean to CPA Firms? (Continued)

• Increased communication between auditor and
  client management
• More emphasis of the auditors role vs.
  management responsibilities
• Increase in outsourcing of accounting services
  (including preparation of financial statements)
• More internal control engagements

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Financial Audit Reporting Internal Control

• Definitions of Internal Control Deficiencies
  (Consistent with SAS No.112)
• Significant deficiency a deficiency in
  internal control, or combination of deficiencies,
  that adversely affects the entitys ability to
  initiate, authorize, record, process, or report
  financial data reliably in accordance with
  generally accepted accounting principles such
  that there is more than a remote likelihood that
  a misstatement of the entitys financial
  statements that is more than inconsequential will
  not be prevented or detected.

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Financial Audit Reporting Internal Control

• Definitions of Internal Control Deficiencies
  (Consistent with SAS No.112)
• Material weakness a significant deficiency, or
  combination of significant deficiencies, that
  results in more than a remote likelihood that a
  material misstatement of the financial statements
  will not be prevented or detected.

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Reporting Internal Control Deficiencies

• Old Definitions
  New Definitions SAS 112

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Financial Audit Reporting Reporting Fraud,
Illegal Acts, Other Noncompliance, Abuse

• When auditors conclude that any of the following
  has occurred or is likely to have occurred, they
  should include in the audit report the relevant
  information about
• Fraud and illegal acts that are greater than
  inconsequential
• A-133 Reporting
• Material violations of contracts or grant
  agreements
• Material abuse

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Financial Audit Reporting Communicating
Significant Matters

• Auditors may communicate the following matters
  when they become aware that such issues exist
• Concerns or significant uncertainties about the
  fiscal sustainability of a major funder or
  program significant to the financial condition or
  operations
• Unusual or catastrophic events that likely will
  have significant ongoing or future impact
• Significant uncertainties
• Any other matter that the auditor considers
  significant
• Determining whether to communicate in the
  auditors report is a matter of professional
  judgment

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Significant Control Deficiencies

• Inability to prepare financial statements
• Lack of timely reconciliations
• Qualifications and training of employees
• No monitoring of internal controls
• Ineffective internal controls

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Material Weaknesses

• Significant audit adjustments
• Restatement of prior financial statements for
  material misstatement
• Uncorrected internal control deficiencies
• Fraud by management
• Management override
• Deficiencies in IT controls
• Ineffective oversight over financial reporting

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What Can You Do?

• Educate yourself-internal controls, understanding
  financial statements and disclosures
• Eliminate all audit adjustments
• Educate your governing body
• Inventory your system-disclosures, processes and
  cycles, significant accounts
• Be prepared to respond positively to a
  significant deficiency or material weakness

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QUESTIONS?

• Gelman, Rosenberg Freedman
• Certified Public Accountants
• 4550 Montgomery Avenue, Suite 650 North
• Bethesda, MD 20814
• 301-951-9090
• www.grfcpa.com
• James Larson, CPA
• jlarson_at_grfcpa.com
• Jeff Freedman
• jfreedman_at_grfcpa.com

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• Thank you for your time!
• Gelman, Rosenberg FreedmanCertified Public
  Accountants
• Member of the American Institute of
• Certified Public Accountants
• Private Companies Practice Section