Three proposals issued by the AICPA Auditing Standards Board (ASB) are designed to enhance the relevance and usefulness of the auditor’s report for audits of nonissuers:
- Proposed Statement on Auditing Standards: Auditor Reporting and Proposed Amendments—Addressing Disclosures in the Audit of Financial Statements would revise and expand the auditor’s report and seeks alignment with the guidance of the International Auditing and Assurance Standards Board (IAASB).
- Proposed Statement on Auditing Standards: The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports is designed to bring consistency to auditors’ consideration of and enhance the auditor’s responsibilities with respect to other information in annual reports.
- Proposed Statement on Auditing Standards: Omnibus Statement on Auditing Standards—2018 would align generally accepted auditing standards (GAAS) with PCAOB standards on communication with audit committees and related parties.
Comments on the exposure drafts can be submitted by May 15. Comments on the auditor reporting and omnibus proposals can be emailed to Sherry Hazel at Sherry.Hazel@aicpa-cima.com. Comments on the other information proposal can be submitted to Mike Glynn at Mike.Glynn@aicpa-cima.com.
The provisional effective date of the proposals would not be earlier than for audits of financial statements for periods ending on or after June 15, 2019.
New structure for the auditor’s report
The auditor reporting proposal, if approved, would create a new structure for the auditor’s report for all audits of financial statements of nonissuers. Users of financial statements and the auditor’s report have been eager for more information about significant aspects of the audit, and the IAASB and the PCAOB have undertaken projects to change their auditor’s reporting models to provide more of that information.
The ASB undertook its own project to consider the implications of these developments on auditors’ reports issued for audits of nonissuers. The most significant changes in the proposal would include:
- Requiring the “Opinion” section to be presented first in the auditor’s report, followed by the “Basis for Opinion” section.
- Requiring a statement about the auditor’s independence and fulfillment of the auditor’s other ethical responsibilities in accordance with relevant ethical requirements relating to the audit. This statement would be included in the “Basis for Opinion” section.
- Requiring the auditor to report in accordance with proposed amendments to the ASB’s going-concern standard.
- Requiring the auditor to report in accordance with an ASB proposal on the auditor’s responsibilities relating to other information included in annual reports.
- Expanding the description of the responsibilities of management for the preparation and fair presentation of the financial statements. Nonissuers also would be required to identify those responsible for oversight of the financial reporting process, such as audit committees. For nonissuers without audit committees, those with this responsibility would be referred to as those charged with governance.
- Expanding the description of the responsibilities of the auditor and key features of the audit.
Although the proposal is intended to converge with the IAASB’s International Standard on Auditing 700 (Revised), Forming an Opinion and Reporting on Financial Statements, the ASB proposal would differ from the international standard by not requiring auditors of nonissuers to communicate “key audit matters” in the auditor’s report.
The IAASB requires communication of key audit matters, which are the most significant matters in the audit of the financial statements of the current period. The ASB would permit disclosure of key audit matters for nonissuer audits if the auditor is engaged to report on them as part of the terms of the audit engagement.
If the engagement terms require disclosure of key audit matters, they would be communicated in accordance with a newly proposed Statement on Auditing Standards, Communicating Key Audit Matters in the Independent Auditor’s Report.
Clarity on other information
The other information proposal would supersede AU-C Section 720, Other Information in Documents Containing Audited Financial Statements.
The proposal is designed to reduce diversity in practice by clarifying that the auditor is required to consider only those documents that constitute the entity’s “annual report.” For documents covered by the proposal, auditors would be required to read the other information and:
- Consider whether there is a material inconsistency between the other information and the financial statements;
- Consider whether there is a material inconsistency between the other information and the auditor’s knowledge obtained in the audit.
- Respond appropriately when identifying material inconsistencies or becoming aware that other information appears to be materially misstated.
The proposal would also bring transparency of the auditor’s work with respect to other information by requiring that the auditor’s report on the financial statements include a separate section when, at the date of the auditor’s report, the auditor has obtained some or all of the other information.
Aligning with PCAOB standards
In the omnibus exposure draft, the ASB proposed aligning GAAS with PCAOB Auditing Standard 1301, Communication With Audit Committees, and Auditing Standard 2410, Related Parties. Those standards were issued after the ASB completed its clarity project of its auditing standards in 2012.
The ED proposes amending various AU-C sections in the AICPA Professional Standards to enhance quality of audits of financial statements of nonissuers in an effective and efficient manner.
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.