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HIGHLIGHTS

News highlights for October 2013

 

October 2013

The PCAOB proposed sweeping changes to the auditor’s reporting model for U.S. public companies that would include a requirement for auditors to identify and describe “critical audit matters.”

In addition, the PCAOB proposed new standards and related amendments that would require:

  • A statement of auditor independence. This would explain that the auditor is a public accounting firm registered with the PCAOB and is required to be independent with respect to the company.
  • Tenure disclosure. The audit firm would disclose the year it began serving as a company’s auditor.
  • Other information explanation. The auditor would be required to describe the procedures and evaluation the firm performed on other types of information included in the annual report outside the financial statements.
  • Language enhancements. These would change existing language in the auditor’s report related to the auditor’s responsibilities for fraud and notes to the financial statements.


Stakeholders can comment on the proposal by Dec. 11 at the PCAOB’s website, pcaobus.org. Some of the proposal’s elements are similar to an auditor’s reporting model proposal made a month earlier by the International Auditing and Assurance Standards Board (IAASB), although the proposals were developed independently.

The PCAOB proposal, available at tinyurl.com/kmoro6d, is designed to change how auditors report without significantly changing the procedures they perform. A key component of the proposal would be the requirement to identify and report on critical audit matters, which are defined as matters addressed during the audit that:

  • 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.


When critical audit matters are determined, auditors would be required in their report to identify the critical audit matter; describe the considerations or reasons that the matter was identified as critical; and refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter, when applicable.

The communication is not intended to alter the auditor’s opinion on the financial statements as a whole. If the auditor determines there are no critical audit matters to communicate, the auditor would state that conclusion in the auditor’s report.

The proposed “other information” standard describes new procedures the auditor would be required to perform. The auditor would be required to evaluate information that is included in an annual report filed in Form 10-K, but is outside the audited financial statements. Selected financial data and management’s discussion and analysis would be among the items the auditor would be required to evaluate.

In addition, the proposed standard describes procedures the auditor would be required to perform after identifying a material inconsistency or material misstatement between the other information and the audited financial statements.

When issuing the auditor’s report, the auditor would include, in a separate section, specific statements regarding the auditor’s responsibilities for the other information. Regardless of whether an inconsistency or misstatement of fact is discovered, the auditor would report the results of that evaluation.

The IAASB’s exposure draft includes a new proposed international auditing standard, Communicating Key Audit Matters in the Independent Auditor’s Report, which directs auditors to communicate in their reports matters that, in their professional judgment, were most significant in the audit.

In addition, the IAASB proposes requiring auditors to:

  • Include specific statements about going concern in their reports.
  • Make an explicit statement about the auditor’s independence from the audited entity.
  • Disclose the name of the engagement partner in the auditor’s report.


The ED, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs), includes sample reports that illustrate how the proposed guidelines would be applied in various circumstances. Although the IAASB standards are not binding in any jurisdiction, they provide standard setters and auditors worldwide with what the board considers international best practices.

Comments on the IAASB’s ED are due Nov. 22 and can be submitted at the IAASB’s website at tinyurl.com/pqnfcfk, where the ED also is available.

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