NEW AUDIT STANDARDS FOR YEAR-END

The audit climate is changing, from the types and timing of audit procedures to the types and content of audit communications. A new standard, Statement on Auditing Standards (SAS) 114: The Auditor's Communication with Those Charged with Governance, issued December 19, 2006, addresses matters an auditor must communicate to those charged with governance of an organization and supersedes SAS No. 61: Communication with Audit Committees. This SAS will require additional communications for financial statement audits with fiscal years beginning after December 15, 2006.

Why this new standard? SAS No. 114 was issued to address emerging practices in corporate governance and new expectations related to increased open, candid communications regarding significant findings and issues related to the audit.

What changed? SAS No. 61 letters were addressed to the Audit Committee or to a group formally designated to oversee the audit process. If no audit committee or similar group existed, no SAS No. 61 communications were required under professional standards. SAS No. 114 changes the recipient of the communications to whoever is charged with governing the organization, whether it is the President, the CEO, the Audit Committee, or the Board or Directors. This means that each and every organization audited will receive SAS No. 114 communications in the future. SAS No. 114 communications are generally consistent with the requirements under SAS No. 61, but they include certain additional matters and provide guidance on the communication process. In addition, the new standards distinguish between those responsible for overseeing the strategic direction of the organization (i.e. those charged with governance) and those responsible for making decisions about how to execute the strategic directives (i.e. management). Note that management is responsible for the organization's financial statements.

What types of issues will this communication cover? The SAS No. 114 communication will provide a type of "report card" related to the audit, including the following:

• Auditor's responsibility under Generally Accepted Auditing Standards
• Significant accounting policies
• Significant accounting estimates
• Significant audit adjustments
• Disagreements with management
• Consultation with other independent accountants ("opinion shopping")
• Issues discussed prior to retention of independent accountants
• Difficulties encountered in performing the audit
• Overview of the planned scope of the audit (New)
• Representations the auditor is requesting from management (New)

In summary, SAS No. 114 is intended to both expand communications and to stress the importance of effective two-way communication between those governing organizations and the external auditors. The goal of this new SAS as well as the other recently issued standards is to continue to improve the quality of audits and the clarity of audit related communications.

Ms. Hollenhorst may be reached directly at ahollenhorst@rubino.com. For more information about Rubino & McGeehin, please visit http://www.rubino.com/ or call 301.564.3636.