The PCAOB issued a concept release Tuesday on possible changes to the auditor’s reporting model including the addition of an auditor’s discussion and analysis (AD&A), mandatory emphasis paragraphs, assurance on non-GAAP information and clarification of standard language.
A fact sheet issued with the release summarizes each of the possible changes.
Auditor’s discussion and analysis (AD&A). This supplemental narrative report to the auditor’s report would allow the auditor to discuss his or her views regarding significant matters. The board says the AD&A could include information such as audit risks identified in the audit, audit procedures and results, and auditor independence. It also could include a discussion of the auditor’s views regarding the company's financial statements, such as management's judgments and estimates, accounting policies and practices, and difficult or contentious issues, including “close calls.”
“An AD&A, as contemplated in the concept release, is not intended to provide separate assurance on individual balances, disclosures, transactions, or any other matters discussed,” the fact sheet says. “Rather, an AD&A is intended to facilitate an understanding of the auditor’s opinion on the financial statements taken as a whole.”
Required and expanded use of emphasis paragraphs. This would require inclusion of an expanded emphasis paragraph (currently optional) in all audit reports. The emphasis paragraph would highlight the most significant matters in the financial statements and identify where these matters are disclosed in the financial statements.
The board says “emphasis paragraphs could be required in areas of critical importance to the financial statements, including significant management judgments and estimates, areas with significant measurement uncertainty and other areas that the auditor determines are important for a better understanding of the financial statement presentation. With respect to each matter of emphasis under this alternative, the auditor also could be required to comment on key audit procedures performed pertaining to the identified matters.”
Auditor assurance on other information outside the financial statements. This would require auditors to provide assurance on information outside the financial statements, such as management’s discussion and analysis (MD&A) or other information (for example, non-GAAP information or earnings releases).
The board says the additional reporting “could be based on certain aspects of the current attest standard and report, but [current PCAOB attest standards] do not represent the only alternative for reporting on MD&A or portions thereof.”
Clarification of language in the standard auditor’s report. Another enhancement to the current auditor’s report, the board says, could involve clarifying what an audit represents and auditor responsibilities. Language and concepts that could be clarified include: reasonable assurance, auditor’s responsibility for fraud, auditor’s responsibility for financial statement disclosures, management’s responsibility for the preparation of the financial statements, auditor’s responsibility for information outside of the financial statements, and auditor independence.
The board says the four potential changes outlined above, which it calls “alternatives,” are not mutually exclusive. “A revised auditor’s report could include one or a combination of the alternatives, elements within the alternatives, or alternatives not currently presented in the concept release,” the fact sheet says.
“These alternatives are not intended to alter, in any way, the auditor’s ultimate responsibility to obtain sufficient appropriate audit evidence to support the audit opinion,” the fact sheet says. “Nor are these alternatives intended to qualify or piecemeal the auditor’s opinion or to shift the requirement to assess the risk of material misstatement of the financial statements from the auditor to investors or other users of financial statements.”
“I think expanding emphasis paragraphs, clarifying the meaning of the audit report and having auditors associated with Management’s Discussion and Analysis (MD&A) could give investors more confidence in financial reports,” said Cindy Fornelli, executive director for Center for Audit Quality, which is affiliated with the AICPA.
The changes outlined above, the PCAOB acknowledges, would likely require the development of additional auditing standards or rules through collaboration with the SEC.
Comments on the concept release are due Sept. 30. The board also announced that it plans to hold a public roundtable to discuss the concept release in the third quarter. To comment or for more information, click here.
Click here to read "PCAOB Set to Expand Under New Mandates," an interview with PCAOB Chairman James R. Doty, in the July 2011 issue of the Journal of Accountancy.
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