Of Interest

Financial news that matters to you.

While we consider ourselves experts in many areas of general accounting, there are a few specific industries where we've spent a great deal of time.

You see, a large concentration of our clients serve similar industries, so over the years we've been able to concentrate our efforts on learning the intricacies of their specific industries and tax needs.

This quarter we're focusing on recent changes to employee benefit auditing...

 

AICPA's Employee Benefit Plan Audit Quality Center sheds light on
SAS 103 and 112: Recent Changes Impact Employee Benefit Audits

Two new Statements on Auditing Standards (SAS)—No. 112, Communicating Internal Control Related Matters Identified in an Audit and No. 103, Audit Documentation—were recently implemented and will affect how we conduct your Employee Benefit Plan audits in the coming years. These new standards were designed to enhance auditor performance and improve audit effectiveness and will pertain to all financial statement audits for periods ending on or after December 15, 2006.

So what do they mean for how we conduct your audits? Let's look at these new standards on an individual level, beginning with SAS No. 112.

SAS No. 112 will require us to evaluate identified internal audit controls upon reviewing your financial statements and determine whether those deficiencies, either individually or in combination, result in significant deficiencies or material weaknesses. No. 112 then requires us to communicate our findings in writing to you, management, and those charged with financial governance. This new standard will work in conjunction with other new Risk Assessment Standards being implemented this year. Together, they stress the importance of internal control over financial reporting. These standards will enable us to balance the costs and benefits of enforcing adequate controls over the auditing process and are designed to minimize the risk of financial misstatements during the financial reporting process.

How do I know if I have a significant deficiency or material weakness?

That's a good question. As part of the auditing process, we'll determine, define, and communicate your situation for you. In the meantime, please consider the following definitions provided by American Institute of Certified Public Accountants.

Control Deficiency — A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

Significant Deficiency — A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's 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 entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control.

Material Weakness — A material weakness is 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 by the entity's internal control.

As we said earlier, we'll help you understand what your organization is facing specifically and provide a detailed report so that you can decide how you'd like to address each issue on an individual level. With that being said, there are some cases where audits could reveal both significant deficiencies and material weaknesses. They include:

» The employee benefit plan lacks sufficient segregation of accounting duties

» The plan lacks internal expertise in the areas of financial accounting, reporting, and internal control

» The plan does not adequately monitor the activities of TPAs (third-party administrators) or account custodians

» The plan audit identifies material misstatements in accounting records that were not identified by the plan's internal control

Now, let's focus on SAS. No. 103.

Primarily, SAS No. 103 will require us to seek out more information than we have in years past, document our work more thoroughly, and provide comprehensive conclusions so that any outside auditor will be able to understand all aspects of your financial situation. This work will prove invaluable in the event that our work and your records are subject to litigation.

Importantly, SAS No. 103 will impact the date we file our auditor's reports on your behalf. The new standards mandate that we cannot date our reports until after we have more than enough evidence to support our findings and also that our documentation work has been reviewed, financial statements have been prepared, and a management letter has been signed designating us as your representation.

Both SAS. No. 112 and 103 mean that we may need to spend additional time gathering information, formalizing our conclusions, and ensuring that financial statements are reported accurately while allowing time for all financial statement disclosures to be completed.

If you have any questions about these new audit standards and how they affect your business specifically, please don't hesitate to call us at 610-687-1600. After all, one of the things we pride ourselves on is our accessibility, in addition to our reliability and naturally our accountability.

 

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