SAS 114

THE AUDITORS COMMUNICATION WITH

THOSE CHARGED WITH GOVERNANCE

Michael Moreland & Kathryn Beseau

Partners
Moreland & Associates, Inc.

STATEMENTS ON AUDITING STANDARDS

(SASS)
2

Issued by the AICPA

Apply to all industries

Deal with the way an audit is conducted, not

accounting issues

EFFECTIVE DATE AND APPLICABILITY

3

Effective for periods beginning on or after December

15, 2006
Applicable to communications in relation to an audit

of financial statements

DEFINITION
4

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
5

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
6

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

7

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
8

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
9

Matters communicated may include:

1. How the auditor proposes to address significant
risks due to fraud or error
2. The auditors 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
10

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
11

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

12

If the auditor believes the two-way communication is

inadequate, he should consider:
Modifying the auditors 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

13

An article in the November issue of Western City

Magazine
Part of Januarys 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?
14

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?