LETTER TO CLIENTS – SAS 112

As a follow-up to our letter on Statement of Auditing Standards (SAS) No. 103, Audit Documentation, we’d like to bring another pronouncement to your attention. Effective for audits of periods ending on or after December 15, 2006, SAS No. 112, Communicating Internal Control Related Matters in an Audit, made substantial changes to the reporting of internal control related matters in an audit. The terminology changed, and virtually every company should expect to receive some form of written communication addressing internal control weaknesses and recommendations.

For many companies, communications regarding internal controls have traditionally taken place verbally. Questions could be posed to clarify management’s understanding of the auditor’s comments and recommendations. Formal letters were prepared only at management’s request. As a result of SAS No. 112, however, significant deficiencies and material weaknesses, defined below, must be communicated in writing.

A significant deficiency is an internal control deficiency, where the likelihood is more than a remote, that a misstatement of a company’s financial statements, that is more than inconsequential (i.e., significant), will not be prevented or detected. A material weakness is a significant deficiency where the misstatement is material (i.e., more than just significant) to the financial statements will not be prevented or detected.

SAS No. 112 further provides specific examples of internal control deficiencies that must be reported, including but not limited to:

• Employees who lack training to fulfill assigned functions
• Failure to perform reconciliations of significant accounts
• Lack of control over the period-end financial reporting process
• A material misstatement not identified by the entity’s internal controls
• Failure to address previously communicated control deficiencies

Because of SAS No. 112, many companies will now be receiving an internal control letter discussing weaknesses and recommendations for the first time. This is intended to be a positive step – a better attempt by the CPA profession to communicate such matters identified during an audit to an organization’s management group. This will hopefully improve financial reporting for all users over time.

We will discuss the specific reporting requirements of SAS No. 112 with you as we plan audits for years ending December 31, 2006 and later. Please contact us if you have any questions.

Sincerely,

The Shareholders
Rubino & McGeehin, Chartered