Page 87 - Auditing Standards

As of December 15, 2017

AS 1305: Communications About Control Deficiencies in an

Audit of Financial Statements

Interpretations of AS 1305: AI 12

Note: For an integrated audit of financial statements and internal control over financial reporting, see
paragraphs .78-.84 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with
An Audit of Financial Statements.

Note: The following paragraphs apply in an audit of financial statements only:

.01 In an audit of financial statements, the auditor may identify deficiencies in the company's internal control

over financial reporting. A control deficiency 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 objective is missing or
(b) an existing control is not properly designed so that, even if the control operates as designed, the

control objective would not be 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.

.02 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, that is less severe than a material weakness yet important enough to merit attention by those

responsible for oversight of the company's financial reporting.

.03 A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial

reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely basis.

Note: There is a reasonable possibility of an event when the likelihood of the event is either "reasonably
possible" or "probable," as those terms are used in paragraph 3 of Financial Accounting Standards Board

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