Statement of Auditing Standards (SAS): SAS No. 115 and SAS No. 112
Every company requires a system that enables its financial information to be documented properly for the sake of records and final reports. These systems have for a long time been regulated under the internationally accepted accounting rules which give assumptions, standards as well as principles that guide the operations. Specifically speaking, the Statement of Auditing Standards (SAS) have been platforms that guide the auditors who embark on the issues of doing check-ups on financial information of individual firms. This exercise is going to embark on the SAS 112 and 115 by focusing on their differences, how the changes of the former to the latter will affect the auditors.
The SAS 112 was applicable on the period starting on December 2006 onwards with an aim of mechanization of the auditing activity. In other words, it required the auditor to communicate in writing to the managers of the firms they were auditing in writing, explaining the deficiencies and weaknesses they identified. Later in December 2009, there was the introduction of the SAS 115 which was an improvement over the former. This new mode established standards and provided guidance on communicating matters that related to an entity’s internal control over the reporting that was identified in the financial standards during the audit.
As matter of fact, the concept of SAS 112 was characterized by significant deficiencies as well as the material weaknesses as the American Institute of CPAs (2011) illustrates. A significant deficiency is a lack of sufficient information in internal control that is less severe than a material weakness but very important to show a considerable discrepancy through which those charged with governance must be taken to task. In a layman’s language in times when an audit takes place some funds may not be accounted for, hence the SAS 112 provided that such discrepancies be used to place those in charge with the financial governance into question.
A material weakness is a significant deficiency that results in a likelihood that a material misstatement of the financial statement will not be prevented or detected. When auditors in this case were evaluating the significance of a control deficiency, they looked at both the likelihood and magnitude of potential misreporting in financial statement. However, the SAS was put under severe criticism in the way of operation and the impact on the firm’s management. This is because it is clear that it did not significantly change what the auditors should have been reporting to the management. Rather it redefined the level of items that were to be communicated.
This was the reason why the SAS 115 was formulated three years later. It showed a new definition of the material deficiency in internal control such that there is a “reasonable possibility” that a material misstatement of an entity will not be prevented or detected on a timely basis. This was a more detailed look at this issue than the former standard. In addition to that it did away with a list of deficiencies which normally were considered “significant”.
However so, the 115 was not brought to change the mode of reporting the financial items rather it provided more flexibility and gave more space for judgment. The biggest change that the auditors have to undergo is the ability to make more large scale judgment on their own regarding what they find out.
In conclusion the two standard namely 112 and 115 are put in place to give the auditor rules and regulation on his operability however with the introduction of the new set of standards namely 115 there was provision for more flexibility. Ultimately, it is clear that the changes of the former to the latter will affect the auditors in a significant way.