SOURCE: Accounting Management Solutions

November 29, 2006 09:00 ET

Private Companies and Nonprofits Need to Prepare for SAS 112, According to Accounting Management Solutions

WALTHAM, MA -- (MARKET WIRE) -- November 29, 2006 -- A new auditing standard that goes into effect next month means organizations should take steps to assess their internal controls, according to Accounting Management Solutions, Inc. (AMS), New England's leading provider of outsourced accounting, financial management, and recruiting services.

The new standard -- Statement on Auditing Standards (SAS) No. 112 issued by the American Institute of Certified Public Accountants -- defines the threshold for which control deficiencies must be reported in external financial statement audits. It takes effect for audits of financial statements for periods ending on or after December 15, 2006.

According to AMS, SAS 112 makes definitions used for audits of private and nonprofit entities consistent with those used for audits of public companies.

"The bottom line is that auditors will have less discretion and will require more documentation from management to support conclusions about the effectiveness of internal controls, "says AMS Managing Director Connie Wright. "It will no longer suffice for management to say adequate controls are in place. They'll have to demonstrate this."

She notes that the new definitions of significant deficiency and material weakness define the threshold for reportable control deficiencies for nonpublic entities.

As a result, Wright says, "Auditors are more likely to increase the reporting of errors and irregularities as significant deficiencies and material weaknesses."

SAS 112 is applicable where auditors express an opinion on financial statements (including a disclaimer of opinion). In particular, it defines "significant deficiency" and "material weakness," provides guidance on evaluating the severity of control deficiencies identified in an audit of financial statements, and requires the auditor to communicate, in writing, to management and those responsible for governance significant deficiencies and material weaknesses identified in an audit.

To prepare for SAS 112, AMS recommends a five-step approach, as follows:
1) Perform a risk assessment.
2) Document processes and assess effectiveness of the design of key
controls based on the risk assessment.
3) Remediate absent or ineffectively designed controls.
4) Test that key controls are effective, remediate as necessary.
5) Support quarterly, annual assessments and attestations.
"While this work can be done without developing a full-fledged internal audit department, the key issue to address is to systemically examine risk and the internal controls over that risk and then take steps to address and maintain it," says Wright.


Accounting Management Solutions, Inc.,, based in Waltham, Mass., is the leading provider of outsourced accounting, financial management, and recruiting services to emerging companies and public, private, and nonprofit organizations throughout New England. Services include interim and part-time accounting and financial management professionals, Sarbanes-Oxley compliance support, and financial consulting.

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