On August 13, 2013, the PCAOB proposed two new auditing standards and related amendments pertaining to the auditor’s reporting model and the auditor’s responsibilities regarding other information in annual reports filed with the SEC. The two proposed standards in PCAOB Release No. 2013-005 are: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (the proposed auditor reporting standard), and The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report (the proposed other information standard). The proposed standards and related amendments would be effective for audits of fiscal years beginning on or after December 15, 2015, subject to Board and SEC approval.
Proposed Auditor Reporting Standard
The proposed auditor reporting standard is intended to enhance the auditor’s reporting model and provide investors and other financial statement users with more valuable information tailored to the particular audit. The proposed standard would still retain the basic elements of the current auditor’s report and the “pass/fail” model; however, it would require the communication of significantly more information relevant to the financial statement users. These additional communication requirements and proposed changes include:
- The communication of critical audit matters related to the current period’s financial statements.
- Enhanced language related to the auditor’s responsibilities under PCAOB standards and procedures performed to assess the risks of material misstatement whether due to error or fraud, as well as references to the notes to the financial statements when identifying the audited financial statements.
- Establishment of additional communication requirements, including language surrounding:
- Auditor independence and that the auditor is a public accounting firm registered with the > PCAOB;
- The year the auditor began serving consecutively as auditor (auditor tenure); and,
- Auditor responsibilities regarding other information included in the annual report.
Critical Audit Matters>>The proposed standard defines critical audit matters as those addressed during the audit which:
- “Involved the most difficult, subjective, or complex auditor judgments;
- Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or
- Posed the most difficulty to the auditor in forming an opinion on the financial statements.”
Further, the proposed standard highlights which matters are typically considered critical audit matters due to their significance to the audit, which are defined in the proposed standard as those: “(1) documented in the engagement completion document; (2) reviewed by the engagement quality reviewer; (3) communicated to the audit committee; or (4) any combination of the three.” The proposal also includes a list of certain factors to consider, as well as other audit considerations, when determining whether a matter is a critical audit matter.>>For those matters which are determined to be critical audit matters, the proposed standard requires disclosure of the following items within the auditor’s report:
- Identification of the critical audit matter;
- Description of the considerations that led the auditor to that determination; and
- The relevant financial statement accounts and disclosures that relate to the critical audit matter.
Proposed Other Information Standard
The proposed auditor reporting standard is intended to provide additional insight regarding the auditor’s responsibilities for other information outside the financial statements and related notes, require a description of these responsibilities directly in the auditor’s report, and provide general guidance and enhancements to required audit procedures surrounding other information. Included in the proposal is a clarified discussion of what is considered other information subject to the proposed standard.
The auditor should perform the procedures enumerated below to evaluate whether the other information contains “(1) a material inconsistency; (2) a material misstatement of fact; or (3) both.” As described in the proposed standard, the auditor is required to read the other information and evaluate the following:
- Consistency of amounts in the other information;
- Consistency of qualitative matters in the other information;
- Other information not directly stated in the financial statements as compared to relevant audit evidence and conclusions reached;
- Mathematical accuracy of amounts in the other information by recalculating the amounts using the other information, financial statements, or relevant audit evidence.
The auditor should consider all relevant evidence obtained, as well as conclusions reached during the audit, to evaluate the other information, and, consider whether the results of this evaluation require further procedures. The auditor’s report should include a section titled “The Auditor’s Responsibilities Regarding Other Information”, which should incorporate additional disclosures outlined in the proposed standard, including:
- A statement that the auditor evaluated whether the other information contains a material inconsistency with the financial statements and/or a material misstatement of fact;
- A reference to the SEC Exchange Act form type and period end date of the financial statements;
- A statement that the auditor’s evaluation of the other information was based on relevant audit evidence obtained and conclusions reached during the audit;
- A statement that the other information was not audited and that the auditor does not express an opinion on this information; and,
A statement that, based on the auditor’s evaluation, there were no material inconsistencies or material misstatement of fact, or that a material inconsistency or material misstatement of fact identified by the auditor was not properly revised and a description of the matter.