The American Institute of CPAs has issued a new rule (SAS No.114) that expands the items an auditor is required to communicate to the board of directors (or other governing body). As with all matters affecting the board, we recommend up front communication of these changes to avoid surprises or misunderstandings come audit time. The new rules apply to all companies, regardless of their governance structure.
Prior to SAS No. 114, the auditor was required to communicate certain matters related to the audit to the audit committee, or other committee charged by the board with oversight of the organization’s financial reporting. The illogical result under the old rules was that, if the board had no such committee (i.e., if such oversight was carried out by the full board), the communications weren’t required.
Under the new rule, that is no longer the case and communication must occur with whichever governing body is responsible for financial reporting oversight. This could include (for example) the audit committee or the full board of directors. In the absence of an official governing body, communications are directed at the owner(s).
In cases where these communications have been made to a subgroup of the board of directors (for example, those who are actively involved in managing the company, in situations where other members of the board are not), the auditor is required to consider whether it is necessary to also communicate these matters to the other members of the board. This determination may depend on the nature of the topics, the company’s governance structure, and other factors.
Matters the auditor is required to communicate under SAS No. 114 include:
We would be happy to discuss the details of SAS No. 114 or answer any questions on how it directly affects your company and your board.