AAF NEWS FLASH

If you are preparing for an audit this year, we want to make you aware of a new auditing standard Statement on Auditing Standards (SAS) 115: Communicating Internal Control Related Matters Identified in an Audit. This new standard goes into effect for all financial statement audits for periods ending on or after December 15, 2009. As with its predecessor, we need to determine, during the audit, if any deficiencies in internal control are significant deficiencies or material weaknesses.

This standard provides:

• new definitions of the terms material weaknesses and significant deficiencies, and
• direction and guidance as to how to evaluate whether a deficiency in internal controls is a significant
_ deficiency or material weakness.

As with the old standard, the new one also requires that we communicate, in writing, to management and those charged with governance, significant deficiencies or material weaknesses. We are required to include those communicated to you during previous audits, either orally or in writing, if they have not yet been remedied.

Communicating significant deficiencies or material weaknesses in writing is important to heighten your awareness of internal control over financial reporting and to enable management and those charged with governance in your organization to better assess the costs and benefits of implementing any new controls. This also helps minimize the risks of financial statement misstatements, including those caused by fraud.

For your convenience, below is a summary of definitions relating to the new standard. If you have questions, we are available to discuss any questions you may have related to internal controls, examples of deficiencies in internal controls, or other matters related to your audit. If you would like to schedule a meeting to address your questions or discuss this new standard in advance of an audit, please feel free to contact the partner in charge of your audit.

Deficiency in Internal Control	exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis.
Deficiency in Design	exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if it operates as designed, the control objective would not be met.
Deficiency in Operation	exists when (a) a properly designed control does not operate as designed or (b) when the person performing the control does not possess the necessary authority or competence to perform the control effectively.
Material Weakness	a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.
Significant Deficiency	a deficiency, or a 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.

We look forward to working with you!

Sincerely,

Your Friends at Alexander, Aronson, Finning & Co.

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