Agenda - 10-18-2007-1 - Laserfiche WebLink

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Memorandum No. 1077 August 1, 2007 Page 6 of 7 Appendix A List of SAS No. 112 Terminology SAS No. 112 establishes important terms (underlined) that are necessary in understanding this standard. A control delciency 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 misstatements on a timely basis. • A deficiency in design exists when: a) a control necessary to meet the control objectives is missing or b) an existing control is not properly designed so that, even if it operates as designed, the control objective is not always met. • A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively. Control deficiencies may involve one or more of the five interrelated components of internal control: a) the control environment, b) risk assessment, c) control activities, d) information and communication, and e) monitoring. A significant deficiency is a control deficiency, or a combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented. A compensating control is a control that limits the severity of a control deficiency and prevents it from rising to the level of a significant deficiency or a material weakness. Compensating controls operate at a level of precision, considering the possibility of further undetected misstatements that would result in the prevention or detection of a misstatement that is more than inconsequential or material to the financial statements. Although compensating controls mitigate the effects of a control deficiency, they do not eliminate the control deficiency. Internal control is a process, affected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the objectives which includes reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term those charged with governance is "the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting and disclosure process." This would be the governing board of directors, a committee of board of directors (e.g., an audit committee), or a committee of management (e.g., finance or budget committees).