GAQC Alert No. 132 

Published December 10, 2009

Auditing Interpretations Issued on Communicating Deficiencies in Internal Control Over Compliance at an Interim Date as a Result of Recovery Act

Dear Center Members,

Members that are auditing clients with Recovery Act funds should be aware that the AICPA Auditing Standards Board, working with the AICPA Governmental Audit Quality Center (GAQC), has responded to questions about "early" communication of deficiencies in internal control over compliance through the issuance of Interpretation Nos. 2–4 of Statement on Auditing Standards (SAS) No. 112, Communicating Internal Control Related Matters Identified in an Audit (AICPA, Professional Standards, vol. 1, AU sec. 325A).

Why Were These Interpretations Issued?

With the issuance of the American Recovery and Reinvestment Act of 2009 (Recovery Act), the Office of Management and Budget (OMB) has encouraged auditors to early communicate deficiencies in internal control over compliance relating to Recovery Act funds, prior to the completion of the single audit. First, as noted in GAQC Alert #127 , the OMB has a pilot project underway at the state government level that is requiring auditors of states that have volunteered for the project to early communicate to management, in writing, the significant deficiencies and material weaknesses relating to certain major programs with Recovery Act funding based on audit work performed as of November 30, 2009. Second, Addendum #1 to the OMB Compliance Supplement added guidance to Part 6, Internal Control, encouraging auditors to promptly inform auditee management and those charged with governance, during the audit engagement, of identified control deficiencies related to Recovery Act funding that are, or likely to be, significant deficiencies or material weaknesses (See GAQC Alert #118 for additional information). While this encouraged communication is not required to be in writing, questions have been raised about whether or how auditors might make such an interim communication in writing.

What Do The Interpretations Say?

The interpretations confirm that an interim written communication of control deficiencies in internal control over compliance may be made and provide illustrative language that auditors may use if participating in the OMB pilot project or if voluntarily communicating based on the guidance in Addendum #1 to the OMB Compliance Supplement . Further, the interpretations state that while such a communication is permitted, that it would not be appropriate for an auditor to issue an interim communication stating that no significant deficiencies or material weaknesses were identified as of the interim date.

Finally, note that although AU section 325A has been superseded by SAS No. 115 (of the same title) to reflect changes in the definitions of control deficiency, significant deficiency and material weakness, these interpretations reference AU section 325A because the OMB has not yet revised the definitions in Circular A-133 for SAS No. 115. Once it does, these interpretations will be conformed and included as interpretations of SAS No. 115 at AU section 325. The GAQC is currently working with OMB to resolve the SAS No. 115 transition and is hopeful that this will be accomplished during the next month .

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AICPA Governmental Audit Quality Center

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