Compliance Requirements and Yellow Book Findings to be Affected by New Auditing Standard


By Roy Lydic

The AICPA Auditing Standards Board issued SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit, which will supersede SAS No. 112 of the same name. Most accounting professionals are all too familiar with the ramifications of the infamous “SAS 112”, which resulted in many governmental agencies and non-profit organizations receiving written audit findings for deficiencies that had existed in their internal controls for many years. Prior to the implementation of SAS 112, many of these findings were reported to management in a separate letter (the management letter). However, Government Auditing Standards now require that “significant deficiencies” in internal control be reported as findings in the auditor’s Yellow Book report.

The major changes that SAS No. 115 will introduce are revised definitions of material weaknesses and significant deficiencies as they relate to internal control over financial reporting. The revised definitions are as follows;

A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

On the surface, it appears the new standard will allow more judgment and interpretation as to when a control deficiency rises to the level of a material weakness or significant deficiency. However, auditors will still be bound by principles that are very similar to SAS 112’s “magnitude” and “likelihood” criteria. 


As a result of issuance of SAS No. 115, we can expect revisions to the Yellow Book as well as A-133 publications, audit guides, etc. As always, we recommend auditees to thoroughly understand the basis and nature of any significant deficiencies and/or material weaknesses that are identified by their auditors. If such deficiencies are reported, carefully crafted “management responses” should be included with the findings, along with feasible “Corrective Action Plans.”

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