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Feb 1989

SASs 60 and 61: bridging the communication gap.

by Grant, Gene

    Abstract- SAS 60 increases the breadth of the control-related matters that should be communicated by an independent auditor to a client's audit committee, and SAS 61 requires independent auditors to directly inform the client group with management oversight responsibility of other audit related matters. In implementing requirements of these new standards into audit practice, accounting firms should establish guidelines for determining what is a reportable condition, and should make client management aware of the new requirements. Compliance with SAS 60 and SAS 61 is expected to change and increase the amount of communication occurring between independent auditors and client management oversight groups.

Over the last several years there has been a gap between what the public thinks independent auditors are responsible for and what auditors believe their responsibility is in auditing financial statements.

The accounting profession has responded to this expectation gap in several ways. One major response was issuance of new Statements of Auditing Standards during the first half of 1988, i.e., SASs 53 to 61.

SASs 60 and 61 are designed to increase both the quantity and quality of communications with the group within the client company that has financial reporting oversight responsibilities. Auditors should be aware of changes in communications with audit committees or similar groups that are required as a result of the issuance of these two new SASs.

SAS 60--Does it Really Change


SAS 20, Required Communications of Material Weaknesses in Internal Accounting Control, required auditors to communicate to senior management and the board of directors only material weaknesses in internal accounting controls that came to the auditor's attention during the audit. This was normally done by a "management letter" delivered to the client along with the audit report. Users of these letters indicated to the ASB that they often had difficulty understanding those communications and that the concept of a material weakness is ambiguous.

SAS 60, Communication of Internal Control Structure Related Matters Noted in an Adult, replaces SAS 20 and requires the independent auditor to report to the audit committee (or its equivalent) all "reportable conditions" noted in the audit. A reportable condition is defined in SAS 60 as matters that represent a significant deficiency in the design or operation of the internal control structure which could adversely affect the organization's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. Some auditors believe that a reportable condition is basically a new term for a material weakness in internal control and consequently SAS 60 does not represent any change in what the existing professional standards require. However, a closer analysis of SAS 60 indicates that this is not true. For example, paragraph 15 indicates that a reportable condition may be of such magnitude as to constitute a material weakness and the auditor may wish to distinguish in his communication between those reportable conditions that are material weaknesses and those that are not.

How does a reportable condition differ from a material weakness? The appendix to SAS 60 provides examples of reportable conditions. These examples are presented in three major categories: 1) deficiencies in internal control structure design; 2) failures in the operation of the internal control structure; and 3) other. While categories (1) and (2) are design and procedures oriented, category (3) includes examples that relate more to management's attitude or intent than to any specific procedural problem.

It would appear then that the new reportable conditions differ from the former material weakness concept in two fundamental ways: 1) a control weakness does not have to permit a material misstatement in financial statements to be a reportable condition; and 2) a reportable condition does not have to be a weakness in the design of internal control procedures or their functioning, but could relate to such things as management's attitude toward controls (control consciousness). Thus, SAS 60 increases the breadth of the control related matters being communicated to the audit committee or board of directors.

SAS 61-Additional Communication


SAS 61, Communication With Audit Committees, requires the independent auditor to directly inform the group with management oversight responsibility of other audit related matters.

An important distinction should be noted between SAS 60 and SAS 61. SAS 60 applies in all audits. SAS 61 applies only to audits to public companies of companies with a formally designated audit committee or other committee charged with financial reporting oversight. The matters to be communicated (either orally or in writing) when SAS 61 applies include: . The auditor's responsibility under GAAS; . Significant accounting policies; . Management judgments and accounting estimates; . Significant audit adjustments, whether recorded or not; . Other information in documents containing audited financial statements; . Disagreements with management; . Consultation with other accountants by management; . Major issues discussed with management prior to retention; . Difficulties encountered in performing the audit.

Any disagreements with management related to application of accounting principles, disclosures in the financial statement, the scope of the audit, or the wording of the audit report should be communicated whether or not these problems were satisfactorily resolved along with any other difficulties encountered in conducting the audit such as unreasonable timetables established by management for the conduct of the audit.

Implementation of SASs 60 and 61

There are several factors that should be dealt with in implementing the requirements of SAS 60 and SAS 61 into an audit practice.

First, CPA firms should develop, as a matter of firm policy, specific guidelines for determining what is a reportable condition. This is a new, yet-to-be well-defined concept in auditing and a clear understanding of what constitutes a reportable condition requires substantial professional judgment. Guidelines should be developed by firms to assist audit staff in the process of identification

Also, many of the required communications in SAS 61 deal with matters that are highly sensitive and the requirement of the standards could result in strained relations between the auditor and management if not dealt with properly. At the very least it would appear to be good practice management to make client management aware of the new requirements before their implementation. SAS 61 also says that reportable disagreements with management do not include differences of opinion based on incomplete facts or preliminary information that are later resolved. To avoid potential conflicts with management, the auditor should communicate potential problems to management quickly to allow management to respond in a way that would eliminate the unnecessary communication of normal differences of opinion while still complying with the spirit of SAS 61.

SAS 60 allows the auditor to eliminate from the communication any exiting condition about which the oversight group already has knowledge provided the oversight group has previously acknowledged its consideration of the unreported deficiencies and the associated risk. By closely communicating with the client oversight group prior to beginning the field work, it is quite likely that the auditor will be able to significantly reduce the volume of necessary postaudit communications with that group while reducing the probability of conflict with management. Such preaudit communications would also prevent the appearance of crisis that might occur if the amount of postaudit communication directed to the oversight group does dramatically increase as a result of compliance with SAS 60 and SAS 61.


Compliance with the requirements of SAS 60 and SAS 61 will likely result in an increase in the amount and changes in the type of communication occurring between the independent auditor and the client's management oversight group. This result is a positive step for the profession that represents a worthwhile reponse to changing demands. With proper implementation planning, the independent auditor should be able to avoid serious difficulties while increasing the quality of client service. Both SASs are effective for audits of financial statements of periods beginning on or after January 1, 1989, with earlier application being permissible. It is not too soon to begin the implementation process.

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