Michael Moreland & Kathryn Beseau

PartnersMoreland & Associates, Inc.

SAS 114THE AUDITORS COMMUNICATION WITH

THOSE CHARGED WITH GOVERNANCE

STATEMENTS ON AUDITING STANDARDS STATEMENTS ON AUDITING STANDARDS (SAS’S)(SAS’S)

Issued by the AICPA

Apply to all industries

Deal with the way an audit is conducted, not accounting issues

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EFFECTIVE DATE AND APPLICABILITYEFFECTIVE DATE AND APPLICABILITY

Effective for periods beginning on or after December 15, 2006

Applicable to communications in relation to an audit of financial statements

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DEFINITIONDEFINITION

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.

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ANOTHER DEFINITIONANOTHER DEFINITION

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.

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IDENTIFYING THOSE CHARGED WITH IDENTIFYING THOSE CHARGED WITH GOVERNANCEGOVERNANCE

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.

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COMMUNICATING WITH SUBGROUPSCOMMUNICATING WITH SUBGROUPS

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

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PURPOSE OF COMMUNICATIONPURPOSE OF COMMUNICATION

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 auditProvide timely observations arising from the

audit that are relevant to their responsibility in overseeing the financial reporting process

Communicate in writing, significant findings

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COMMUNICATING AUDITOR COMMUNICATING AUDITOR RESPONSIBILITIESRESPONSIBILITIES

Matters communicated may include:1. How the auditor proposes to address

significant risks due to fraud or error2. The auditor’s approach relating to internal

control3. The concept of materiality4. The extent of reliance on an internal audit

effort

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QUALIFICATIONS OF THOSE CHARGED QUALIFICATIONS OF THOSE CHARGED WITH GOVERNANCEWITH GOVERNANCE

Requirements to be on the City Council:1. Residency 2. Age3. Receive the most votes(not the ability to oversee the financial

reporting process)

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INEFFECTIVE OVERSIGHTINEFFECTIVE OVERSIGHT

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.

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LACK OF TWO-WAY COMMUCICATIONSLACK OF TWO-WAY COMMUCICATIONS

If the auditor believes the two-way communication is inadequate, he should consider:

Modifying the auditor’s opinion of the basis of a scope limitationObtaining legal advice about the consequences of different courses of actionWithdrawing from the engagement

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HELP IS ON THE WAYHELP IS ON THE WAY

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

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IS MORE NEEDED?IS MORE NEEDED?

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?

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