SAS 114 THE AUDITORS COMMUNICATION WITH THOSE CHARGED

SAS 114 THE AUDITORS COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE Michael Moreland & Kathryn Beseau Partners Moreland & Associates, Inc.

STATEMENTS ON AUDITING STANDARDS (SAS’S) 2 ü Issued by the AICPA ü Apply to all industries ü Deal with the way an audit is conducted, not accounting issues

EFFECTIVE DATE AND APPLICABILITY 3 ü Effective for periods beginning on or after December 15, 2006 ü 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 ü 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. ü When those charged with governance are not clearly identifiable, agreement must be reached.

COMMUNICATING WITH SUBGROUPS 7 ü Consider the responsibilities of the subgroup and the governing body ü The nature of the matters to be communicated ü Whethere is also a need to communicate the information to the governing body

PURPOSE OF COMMUNICATION 8 ü Communicate the responsibilities of the auditor in relation to the financial statement audit (an overview of the scope and timing of the audit) ü Obtain information relevant to the audit ü Provide timely observations arising from the audit that are relevant to their responsibility in overseeing the financial reporting process ü 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 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 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: ü ü ü 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 13 ü An article in the November issue of Western City Magazine ü Part of January’s New Mayors and Council Members Academy program offered by the League of California Cities ü CCMA has recommended that finance directors learn about this requirement before their City Council members

IS MORE NEEDED? 14 ü The League program was for 45 minutes. This was not enough time. ü Most Mayors and City Council members will not be interested. ü A separate stand-alone program should be offered by the League for those who have interest. ü What are your thoughts?