Interim guidance from GAO on 'significant deficiencies' and 'material weaknesses': The GAO offers interim guidance on how the redefinition of two terms will affect auditors.(The Accounting Angle)

For more than a decade, independent auditors and their clients used the terms material weakness and reportable condition to describe the deficiencies uncovered in the course of a financial statement audit. In 2006, the definition of the term material weakness substantially changed, while the notion of a reportable condition gave way to the related but different concept of a significant deficiency. Now, just two years later, both terms have been redefined. In response to this development, the U.S. Government Accountability Office (GAO) has offered interim guidance on how this most recent change will affect auditors performing engagements in conformity with generally accepted government auditing standards (GAGAS).

BACKGROUND

In May 2006, the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 112, Communicating Internal Control Related Matters Identified in an Audit, which took effect for audits of financial statements for periods ending on or after December 15, 2006. A key feature of SAS No. 112 was the introduction of a new terminological framework to describe deficiencies uncovered in the course of a financial statement audit. SAS No. 112 redefined the term material weakness as

 
   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 
   or detected. 

SAS No. 12 also introduced the new term significant deficiency, which it defined as

 
   a control deficiency, or 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 
   or detected. 

The GAO incorporated both definitions into Section 5.11 of the most recent (July 2007) version of Government Auditing Standards, commonly known simply as the "Yellow Book," which establishes GAGAS. The use of GAGAS is required for audits of federal funds (e.g., "Single Audit"). The use of GAGAS also is sometimes ...