Transcript Significant Deficiency New Terms and Definitions

International Auditing and Assurance
Standards Board
Communicating Deficiencies in
Internal Control to Those Charged
with Governance and Management
ISA Implementation Support Module
Prepared by IAASB Staff
October 2009
Overview
• Introduction
• New Terms and Definitions
• Communicating Significant Deficiencies
• Determining Significance of a Deficiency
• Communication of Deficiencies to
Management
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Introduction
Introduction
• The context for developing the standard
• All requirements and guidance relating to
communication of material weaknesses in the
old standards now in one place
• New standard provides enhanced guidance on
– Judging when an identified deficiency in internal
control is significant
– Communicating significant deficiencies to
TCWG
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New Terms and Definitions
New Terms and Definitions
• Term “material weakness” no longer used in
the ISAs
• Standard introduces two new terms
– A deficiency in internal control
– A significant deficiency
• No longer a requirement to communicate
material weaknesses in the ISAs, but a
requirement to communicate significant
deficiencies
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New Terms and Definitions
Deficiency in Internal Control
• This exists when
– A control is designed, implemented, or operated
in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial
statements on a timely basis, or
– A control necessary to prevent, or detect and
correct, misstatements in the financial statements
on a timely basis is missing
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New Terms and Definitions
Significant Deficiency
• Defined as
– A deficiency or combination of deficiencies
in internal control that, in the auditor’s
professional judgment, is of sufficient
importance to merit the attention of those
charged with governance
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New Terms and Definitions
Implications of New Terms and Definitions
• IAASB does not intend that further work be
performed beyond practice of communicating
material weaknesses under old standards
• Significant deficiency regarded as being at the
same level of significance as material weakness
under old standards
• No expectation that new standard should result in
reporting of more matters than would have been
the case with material weaknesses under old
standards
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Communicating Significant Deficiencies
Communicating Significant Deficiencies
• Communicate significant deficiencies in writing to
TCWG on timely basis
• Also communicate significant deficiencies in writing to
management on timely basis, unless inappropriate to do
so in the circumstances
• Requirement to communicate applies regardless of cost
or other considerations by TCWG or management in
determining whether to take remedial action
• Requirement also applies if significant deficiencies
have been communicated in prior audit but no remedial
action has been taken
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Communicating Significant Deficiencies
Content of written communication
• A description of the significant deficiencies
• An explanation of their potential effects
• Sufficient information to enable TCWG to
understand context of communication
– Purpose of audit
– Audit does not include expression of opinion on
effectiveness of internal control
– Significant deficiencies reported limited to those
identified during the audit
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Communicating Significant Deficiencies
Communication of Material Weaknesses in
Law or Regulation
• Some jurisdictions may have a legal or regulatory
requirement for auditor to communicate material
weaknesses to TCWG
– Standard does not directly address such a
requirement
• However, if “material weakness” has not been
defined in law or regulation, standard provides
guidance to explain how interpretation of such a
requirement might be made in context of the
standard
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Determining Significance of a Deficiency
Determining Significance of a Deficiency
• A matter of the auditor’s professional
judgment
– Based on what auditor believes is of sufficient
importance to merit attention by TCWG
• Judgment needs to be made having regard to
roles and responsibilities of TCWG,
informed by auditor’s understanding of the
entity and its environment, including its
internal control
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Determining Significance of a Deficiency
Guidance in Determining Significance
• Auditor’s determination necessarily a
subjective exercise because it rests on
professional judgment
• However, standard provides new guidance to
assist auditor in making that judgment
• In particular, the significance of a deficiency
depends on two factors
– The likelihood that a misstatement could occur
– The potential magnitude of the misstatement
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Determining Significance of a Deficiency
Guidance in Determining Significance
• Standard also provides guidance on
– Relevant considerations, e.g.,
 Susceptibility to loss or fraud of the related asset or
liability
 Subjectivity and complexity of determining
accounting estimates
 Financial statement amounts exposed to the
deficiencies
– Indicators of the existence of significant deficiencies,
e.g.,
 Evidence of ineffective aspects of the control
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environment
Determining Significance of a Deficiency
SME Considerations
• Governance structures will be simpler and
less formal in SMEs relative to larger entities
• Therefore, less of a need for formality in the
communication of significant deficiencies in
SME context
• However, communication of significant
deficiencies will need to be in writing
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Communication of Deficiencies to Management
Communication of Deficiencies to
Management
• Communicate identified deficiencies other than
significant deficiencies to management if auditor
believes that they merit management’s attention
– These other deficiencies may be of importance to
management in effectively discharging their internal
control responsibilities
• Use of professional judgment essential in making this
determination
– No elaborate evaluation or communication process
intended
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Communication of Deficiencies to Management
Communication of Deficiencies to
Management
• However, no requirement to re-communicate other
deficiencies previously communicated to
management by
– The auditor
– Other parties
• Also no requirement to communicate other
deficiencies to management in writing
– In most cases, this communication will take place
when auditor discusses relevant facts and
circumstances of the matter with management
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Note
This set of support slides does not amend or override
the ISAs, the texts of which alone are authoritative.
Reading the slides is not a substitute for reading the
ISAs. The slides are not meant to be exhaustive and
reference to the ISAs themselves should always be
made. In conducting an audit in accordance with
ISAs, the auditor is required to comply with all the
ISAs that are relevant to the engagement.
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