News highlights for November 2012

November 1, 2012

A new auditing standard approved unanimously by the PCAOB is designed to encourage two-way, effective communication between external auditors and audit committees during public company audits.

With the aim of improving audit quality, the PCAOB approved Auditing Standard (AS) No. 16, Communications With Audit Committees, and amendments to other PCAOB standards. AS 16 describes interactions a public company auditor will be required to have with the audit committee.

AS 16 supersedes AU section 310, Appointment of the Independent Auditor, and AU section 380, Communication With Audit Committees. AU section 380 referred to communication between auditors and audit committees as incidental to the audit. The new standard makes it clear that communication is essential to a high-quality audit.

The PCAOB has no jurisdiction over audit committees, so the standard’s requirements are aimed strictly at external auditors. The new standard requires auditors to:

  • Establish the understanding of the terms of the audit engagement with the audit committee. The terms of the engagement must be recorded in an engagement letter. Previously, AU section 310 had required the understanding to be established with company management rather than the audit committee.
  • Provide audit committees with an overview of the overall audit strategy, including the timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or risks.
  • Provide information about others involved in the audit, including internal auditors or other independent public accounting firms.
  • Give information regarding the company’s accounting policies, practices, estimates, and significant unusual transactions.
  • Provide an evaluation of the quality of the company’s financial reporting, including conclusions regarding critical accounting estimates and the company’s financial statement presentation; difficult or contentious matters for which the auditor consulted outside the engagement team; the auditor’s evaluation of the company’s ability to continue as a going concern; and difficulties encountered in performing the audit.


As with all PCAOB standards, AS 16 must be approved by the SEC. The SEC also must determine whether the standard should apply to emerging growth companies as defined by the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106; the PCAOB recommended that such companies be required to apply the standard.

If approved by the SEC, the standard would be effective for public company audits of fiscal periods beginning after Dec. 15, 2012.

The standard is available at tinyurl.com/cawux23.

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