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International Auditing and Assurance

Standards Board

Communicating Deficiencies in

Internal Control to Those Chargedwith Governance and Management

ISA Implementation Support ModulePrepared by IAASB Staff

October 2009


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Introduction New Terms and Definitions

Communicating Significant Deficiencies Determining Significance of a Deficiency Communication of Deficiencies to

Management

Overview

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The context for developing the standard

All requirements and guidance relating tocommunication of material weaknesses in the

old standards now in one place New standard provides enhanced guidance on

Judging when an identified deficiency in internal

control is significant Communicating significant deficiencies to

TCWG

Introduction

Introduction

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Term material weakness no longer used inthe ISAs

Standard introduces two new terms A deficiency in internal control A significant deficiency

No longer a requirement to communicatematerial weaknesses in the ISAs, but arequirement to communicate significantdeficiencies

New Terms and Definitions


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This exists when A control is designed, implemented, or operated

in such a way that it is unable to prevent, or

detect and correct, misstatements in the financialstatements on a timely basis, or

A control necessary to prevent, or detect andcorrect, misstatements in the financial statementson a timely basis is missing

Deficiency in Internal Control


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Defined as A deficiency or combination of deficiencies

in internal control that, in the auditors

professional judgment, is of sufficientimportance to merit the attention of thosecharged with governance

Significant Deficiency


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IAASB does not intend that further work beperformed beyond practice of communicatingmaterial weaknesses under old standards

Significant deficiency regarded as being at thesame level of significance as material weaknessunder old standards

No expectation that new standard should result inreporting of more matters than would have beenthe case with material weaknesses under oldstandards

Implications of New Terms and Definitions


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Communicate significant deficiencies in writing toTCWG on timely basis

Also communicate significant deficiencies in writing tomanagement on timely basis, unless inappropriate to doso in the circumstances

Requirement to communicate applies regardless of costor other considerations by TCWG or management in

determining whether to take remedial action Requirement also applies if significant deficiencies

have been communicated in prior audit but no remedialaction has been taken

Communicating Significant Deficiencies


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A description of the significant deficiencies An explanation of their potential effects

Sufficient information to enable TCWG tounderstand context of communication Purpose of audit Audit does not include expression of opinion on

effectiveness of internal control Significant deficiencies reported limited to those

identified during the audit

Content of written communication


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Some jurisdictions may have a legal or regulatoryrequirement for auditor to communicate materialweaknesses to TCWG Standard does not directly address such a

requirement

However, if material weakness has not beendefined in law or regulation, standard providesguidance to explain how interpretation of such arequirement might be made in context of thestandard

Communication of Material Weaknesses in

Law or Regulation


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A matter of the auditors professional judgment Based on what auditor believes is of sufficient

importance to merit attention by TCWG Judgment needs to be made having regard to

roles and responsibilities of TCWG,

informed by auditors understanding of theentity and its environment, including itsinternal control

Determining Significance of a Deficiency


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Auditors determination necessarily asubjective exercise because it rests onprofessional judgment

However, standard provides new guidance toassist auditor in making that judgment

In particular, the significance of a deficiency

depends on two factors The likelihood that a misstatement could occur The potential magnitude of the misstatement

Guidance in Determining Significance


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Standard also provides guidance on Relevant considerations, e.g.,

Susceptibility to loss or fraud of the related asset orliabilitySubjectivity and complexity of determiningaccounting estimatesFinancial statement amounts exposed to thedeficiencies

Indicators of the existence of significant deficiencies,e.g.,

Evidence of ineffective aspects of the controlenvironment

Guidance in Determining Significance


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Governance structures will be simpler andless formal in SMEs relative to larger entities

Therefore, less of a need for formality in thecommunication of significant deficiencies inSME context

However, communication of significantdeficiencies will need to be in writing

SME Considerations


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Communicate identified deficiencies other thansignificant deficiencies to management if auditor

believes that they merit managements attention These other deficiencies may be of importance to

management in effectively discharging their internalcontrol responsibilities

Use of professional judgment essential in making thisdetermination No elaborate evaluation or communication process

intended

Communication of Deficiencies to

Management

Communication of Deficiencies to Management

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However, no requirement to re-communicate otherdeficiencies previously communicated tomanagement by The auditor Other parties

Also no requirement to communicate otherdeficiencies to management in writing In most cases, this communication will take place

when auditor discusses relevant facts andcircumstances of the matter with management

Communication of Deficiencies to

Management

Communication of Deficiencies to Management

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Note

This set of support slides does not amend or overridethe ISAs, the texts of which alone are authoritative.Reading the slides is not a substitute for reading theISAs. The slides are not meant to be exhaustive andreference to the ISAs themselves should always bemade. In conducting an audit in accordance withISAs, the auditor is required to comply with all theISAs that are relevant to the engagement.

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Copyright October 2009 by the International Federation of Accountants(IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal useand are not sold or disseminated and provided that each copy bears thefollowing credit line: Copyright October 2009 by the InternationalFederation of Accountants (IFAC). All rights reserved. Used with permission of

IFAC. Contact [email protected] for permission to reproduce, store, or transmit this work. Otherwise, written permission from IFAC is required toreproduce, store, or transmit, or to make other similar uses of, this work, exceptas permitted by law. Contact [email protected] .

International Federationof Accountants

ISBN: 978-1-60815-044-1

www.ifac.org
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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