As an increasing number of routine tasks are being automated, CPAs have been seeking opportunities to provide more insight to businesses, clients, investors, and others who use their services.
Auditing standard setters have provided new opportunities for CPAs to provide more value in the form of more informative audit reports.
The International Auditing and Assurance Standards Board (IAASB) issued a standard in 2015 that requires auditors’ reports to communicate “key audit matters”—those that the auditor considered most significant—and how they were addressed.
Earlier this year, the PCAOB modified its rules to require that auditors’ reports include a discussion of “critical audit matters” that were reported to the audit committee and involved especially challenging, subjective, or complex auditor judgment. (Note that the SEC has not yet voted on whether to formally approve the PCAOB’s new auditor’s reporting model, and a letter from 28 businesses and associations this month urged the SEC not to finalize the standard in its current form. The letter said the standard “sets problematic standards for materiality and will be detrimental to public companies.”)
This fall, the AICPA Auditing Standards Board (ASB) is scheduled to expose for public comment a proposal for an auditor’s reporting model that would provide auditors of nonpublic companies an option for sharing more about the information they discover during an audit.
The ASB’s proposed, updated auditor’s reporting model would be similar to the new model used by the IAASB. The ASB’s objective is to increase informational value of the report by including more information about the audit. In addition, the ASB intends for the new model to increase the relevance of the auditor’s report.
Under the proposal, the ASB model would not require auditors of nonissuers to communicate key audit matters in the auditor’s report but would permit auditors to be engaged to report on key audit matters. Key audit matters under the ASB proposal would include complex, difficult, or judgmental areas that were communicated to those charged with governance that held the greatest significance during the audit of the current period.
Under the proposal, the auditor would be required to communicate key audit matters only if the auditor and the entity agree in the engagement letter that key audit matters will be reported. If there is no agreement to report key audit matters, no mention of key audit matters in the auditor’s report would be required. If there is an agreement to report key audit matters and none are identified, the auditor would be required to make a statement to that effect.
The ASB also will propose that auditors’ reports include:
- A new structure and content of the auditor’s report for all audits of financial statements of nonissuers.
- Reporting elements that would be similar to the current elements but presented in different order and with more information to enhance the relevance and usefulness of the auditor’s report for users.
- A new order for items presented in the report. The opinion (which would remain pass/fail) would be presented first, followed by the basis for opinions section.
- An expanded description of responsibilities of management for preparation of financial statements, as well as a requirement to identify those responsible for oversight of the financial reporting process, such as audit committees. For nonissuers without audit committees, those with this responsibility will be referred to as those charged with governance.
- An expanded description of the auditor’s responsibilities.
- Changes related to going concern.
- A separate, required section about auditor’s responsibilities related to other information included in an annual report but not in the financial statements. An additional exposure draft is forthcoming from the ASB on the responsibilities of auditors with respect to this outside information.
More detailed information about the expected content of the ED is available in a podcast describing the highlights of the ASB’s meeting in July.
While these changes to the auditor’s reporting model give practitioners more compliance responsibilities, they also provide more opportunities for auditors to provide additional value in the form of new information that users may find helpful.
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.