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ExpandAS No. 1: References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight Board
ExpandAS No. 3: Audit Documentation
ExpandAS No. 4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist
ExpandAS No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements
ExpandAS No. 6: Evaluating Consistency of Financial Statements
ExpandAS No. 7: Engagement Quality Review
ExpandAS No. 8: Audit Risk
ExpandAS No. 9: Audit Planning
ExpandAS No. 10: Supervision of the Audit Engagement
ExpandAS No. 11: Consideration of Materiality in Planning and Performing an Audit
ExpandAS No. 12: Identifying and Assessing Risks of Material Misstatement
ExpandAS No. 13: The Auditor's Responses to the Risks of Material Misstatement
ExpandAS No. 14: Evaluating Audit Results
ExpandAS No. 15: Audit Evidence
ExpandAS No. 16: Communications with Audit Committees
ExpandAS No. 17: Auditing Supplemental Information Accompanying Audited Financial Statements
ExpandAU Section 100 - Statements on Auditing Standards -- Introduction
ExpandAU Section 200 - The General Standards
CollapseAU Section 300 - The Standards of Field Work
AU Section 315 - Communications Between Predecessor and Successor Auditors
AU Section 316 - Consideration of Fraud in a Financial Statement Audit
AU Section 317 - Illegal Acts by Clients
AU Section 9317 - Illegal Acts by Clients: Auditing Interpretations of Section 317
AU Section 322 - The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements
AU Section 324 - Service Organizations
AU Section 9324 - Service Organizations: Auditing Interpretations of Section 324
AU Section 325 - Communications About Control Deficiencies in an Audit of Financial Statements
AU Section 9325 - Communication of Internal Control Related Matters Noted in an Audit: Auditing Interpretations of Section 325
AU Section 9326 - Evidential Matter: Auditing Interpretations of Section 326
AU Section 328 - Auditing Fair Value Measurements and Disclosures
AU Section 329 - Substantive Analytical Procedures
AU Section 330 - The Confirmation Process
AU Section 331 - Inventories
AU Section 332 - Auditing Derivative Instruments, Hedging Activities, and Investments in Securities
AU Section 333 - Management Representations
AU Section 9333 - Management Representations: Auditing Interpretations of Section 333
AU Section 334 - Related Parties
AU Section 9334 - Related Parties: Auditing Interpretations of Section 334
AU Section 336 - Using the Work of a Specialist
AU Section 9336 - Using the Work of a Specialist: Auditing Interpretations of Section 336
AU Section 337 - Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments
AU Section 9337 - Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments: Auditing Interpretations of Section 337
AU Section 341 - The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern
AU Section 9341 - The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern: Auditing Interpretations of Section 341
AU Section 342 - Auditing Accounting Estimates
AU Section 9342 - Auditing Accounting Estimates: Auditing Interpretations of Section 342
AU Section 350 - Audit Sampling
AU Section 390 - Consideration of Omitted Procedures After the Report Date
ExpandAU Section 400 - The First, Second, and Third Standards of Reporting
ExpandAU Section 500 - The Fourth Standard of Reporting
ExpandAU Section 600 - Other Types of Reports
ExpandAU Section 700 - Special Topics
ExpandAU Section 800 - Compliance Auditing
ExpandAU Section 900 - Special Reports of the Committee on Auditing Procedures

AU Section 325

Communications About Control Deficiencies in an Audit of Financial Statements

[The following is effective for audits of fiscal years ending on or after November 15, 2007. See PCAOB Release 2007-005A.
For audits of fiscal years ending before November 15, 2007, click here.]

AU section 325 is superseded as follows:

  • In an integrated audit of financial statements and internal control over financial reporting, by paragraphs 78-84 of PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.
  • In an audit of financial statements only, by the following paragraphs.

1. 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.

2. 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.

3. 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 Statement No. 5, Accounting for Contingencies.

Note: In evaluating whether a deficiency exists and whether deficiencies, either individually or in combination with other deficiencies, are material weaknesses, the auditor should follow the direction in paragraphs 62-70 of PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.

4. The auditor must communicate in writing to management and the audit committee all significant deficiencies and material weaknesses identified during the audit. The written communication should be made prior to the issuance of the auditor's report on the financial statements. The auditor's communication should distinguish clearly between those matters considered significant deficiencies and those considered material weaknesses, as defined in paragraphs 2 and 3.

Note: If no such committee exists with respect to the company, all references to the audit committee in this standard apply to the entire board of directors of the company. fn 1 The auditor should be aware that companies whose securities are not listed on a national securities exchange or an automated inter-dealer quotation system of a national securities association (such as the New York Stock Exchange, American Stock Exchange, or NASDAQ) may not be required to have independent directors for their audit committees. In this case, the auditor should not consider the lack of independent directors or an audit committee at these companies indicative, by themselves, of a control deficiency. Likewise, the independence requirements of Securities Exchange Act Rule 10A-3 fn 2 are not applicable to the listing of non-equity securities of a consolidated or at least 50 percent beneficially owned subsidiary of a listed issuer that is subject to the requirements of Securities Exchange Act Rule 10A-3(c)(2). fn 3 Therefore, the auditor should interpret references to the audit committee in this standard, as applied to a subsidiary registrant, as being consistent with the provisions of Securities Exchange Act Rule 10A-3(c)(2). fn 4 Furthermore, for subsidiary registrants, communications required by this standard to be directed to the audit committee should be made to the same committee or equivalent body that pre-approves the retention of the auditor by or on behalf of the subsidiary registrant pursuant to Rule 2-01(c)(7) of Regulation S-X fn 5 (which might be, for example, the audit committee of the subsidiary registrant, the full board of the subsidiary registrant, or the audit committee of the subsidiary registrant's parent). In all cases, the auditor should interpret the terms "board of directors" and "audit committee" in this standard as being consistent with provisions for the use of those terms as defined in relevant SEC rules.

5. If oversight of the company's external financial reporting and internal control over financial reporting by the company's audit committee is ineffective, that circumstance should be regarded as an indicator that a material weakness in internal control over financial reporting exists. Although there is not an explicit requirement to evaluate the effectiveness of the audit committee's oversight in an audit of only the financial statements, if the auditor becomes aware that the oversight of the company's external financial reporting and internal control over financial reporting by the company's audit committee is ineffective, the auditor must communicate that information in writing to the board of directors.

6. These written communications should include:

a. The definitions of significant deficiencies and material weaknesses and should clearly distinguish to which category the deficiencies being communicated relate.

b. A statement that the objective of the audit was to report on the financial statements and not to provide assurance on internal control.

c. A statement that the communication is intended solely for the information and use of the board of directors, audit committee, management, and others within the organization. When there are requirements established by governmental authorities to furnish such written communications, specific reference to such regulatory authorities may be made.

7. The auditor might identify matters in addition to those required to be communicated by this standard. Such matters include control deficiencies identified by the auditor that are neither significant deficiencies nor material weaknesses and matters the company may request the auditor to be alert to that go beyond those contemplated by this standard. The auditor may report such matters to management, the audit committee, or others, as appropriate.

8. The auditor should not report in writing that no significant deficiencies were discovered during an audit of financial statements because of the potential that the limited degree of assurance associated with such a report will be misunderstood.

9. When timely communication is important, the auditor should communicate the preceding matters during the course of the audit rather than at the end of the engagement. The decision about whether to issue an interim communication should be determined based on the relative significance of the matters noted and the urgency of corrective follow-up action required. In an audit of financial statements only, auditing interpretation 1 to AU sec. 325, "Reporting on the Existence of Material Weaknesses," continues to apply except that the term "reportable condition" means "significant deficiency," as defined in paragraph 2 of this standard.

Footnotes:

fn 1 See 15 U.S.C. 78c(a)58 and 15 U.S.C. 7201(a)(3).

fn 2 See 17 C.F.R. 240.10A-3.

fn 3 See 17 C.F.R. 240.10A-3(c)(2).

fn 4 See 17 C.F.R. 240.10A-3(c)(2).

fn 5 See 17 C.F.R. 210-2-01(c)(7).