AS 1301: Communications with Audit Committees

Summary Table of Contents 

• .01  Introduction
• .03  Objectives
• .04  Appointment and Retention
• .08  Obtaining Information and Communicating the Audit Strategy
• .12  Results of the Audit
• .25  Form and Documentation of Communications
• .26  Timing
• Appendix A - Definitions
• Appendix B - Communications with Audit Committees Required by Other PCAOB Rules and Standards 
• Appendix C - Matters Included in the Audit Engagement Letter

Introduction

.01       This standard requires the auditor to communicate with the company's audit committee¹ regarding certain matters related to the conduct of an audit² and to obtain certain information from the audit committee relevant to the audit. This standard also requires the auditor to establish an understanding of the terms of the audit engagement with the audit committee and to record that understanding in an engagement letter.

.02       Other Public Company Accounting Oversight Board ("PCAOB") rules and standards identify additional matters to be communicated to a company's audit committee (see Appendix B). Various laws or regulations also require the auditor to communicate certain matters to the audit committee.³ The communication requirements of this standard do not modify or replace communications to the audit committee required by such other PCAOB rules and standards, and other laws or regulations. Nothing in this standard precludes the auditor from communicating other matters to the audit committee.

Objectives

.03       The objectives of the auditor are to:

1. Communicate to the audit committee the responsibilities of the auditor in relation to the audit and establish an understanding of the terms of the audit engagement with the audit committee;
2. Obtain information from the audit committee relevant to the audit;
3. Communicate to the audit committee an overview of the overall audit strategy and timing of the audit; and
4. Provide the audit committee with timely observations arising from the audit that are significant to the financial reporting process.

Note:  "Communicate to," as used in this standard, is meant to encourage effective two-way communication between the auditor and the audit committee throughout the audit to assist in understanding matters relevant to the audit.

Appointment and Retention

Significant Issues Discussed with Management in Connection with the Auditor's Appointment or Retention

.04       The auditor should discuss with the audit committee any significant issues that the auditor discussed with management in connection with the appointment or retention of the auditor, including significant discussions regarding the application of accounting principles and auditing standards.

Establish an Understanding of the Terms of the Audit

.05       The auditor should establish an understanding of the terms of the audit engagement with the audit committee. This understanding includes communicating to the audit committee the following:

1. The objective of the audit;
2. The responsibilities of the auditor; and
3. The responsibilities of management.

.06       The auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee annually. The auditor should have the engagement letter executed by the appropriate party or parties on behalf of the company.⁴ If the appropriate party or parties are other than the audit committee, or its chair on behalf of the audit committee, the auditor should determine that the audit committee has acknowledged and agreed to the terms of the engagement.

Note:  Appendix C describes matters that the auditor should include in the engagement letter about the terms of the audit engagement.

.07       If the auditor cannot establish an understanding of the terms of the audit engagement with the audit committee, the auditor should decline to accept, continue, or perform the engagement.

Obtaining Information and Communicating the Audit Strategy

Obtaining Information Relevant to the Audit

.08       The auditor should inquire of the audit committee about whether it is aware of matters relevant to the audit,⁵ including, but not limited to, violations or possible violations of laws or regulations.⁶

Overall Audit Strategy, Timing of the Audit, and Significant Risks

.09       The auditor should communicate to the audit committee an overview of the overall audit strategy, including the timing of the audit,⁷ and discuss with the audit committee the significant risks identified during the auditor's risk assessment procedures.⁸

Note:  This overview is intended to provide information about the audit, but not specific details that would compromise the effectiveness of the audit procedures.

.10       As part of communicating the overall audit strategy, the auditor should communicate the following matters to the audit committee, if applicable:

1. The nature and extent of specialized skill or knowledge needed to perform the planned audit procedures or evaluate the audit results related to significant risks;⁹
2. The extent to which the auditor plans to use the work of the company's internal auditors in an audit of financial statements;¹⁰
3. The extent to which the auditor plans to use the work of internal auditors, company personnel (in addition to internal auditors), and third parties working under the direction of management or the audit committee when performing an audit of internal control over financial reporting;¹¹
4. The names, locations, and planned responsibilities¹² of other independent public accounting firms or other persons, who are not employed by the auditor, that perform audit procedures in the current period audit; and
   
   

   Note:  The term "other independent public accounting firms" in the context of this communication includes firms that perform audit procedures in the current period audit regardless of whether they otherwise have any relationship with the auditor.

5. In an audit that involves other auditors or referred-to auditors, the basis for the engagement partner’s determination that the participation of his or her firm is sufficient to serve as the lead auditor, if significant parts of the audit are to be performed by other auditors or referred-to auditors.¹³

.11       The auditor should communicate to the audit committee significant changes to the planned audit strategy or the significant risks initially identified and the reasons for such changes.¹⁴

Results of the Audit

Accounting Policies and Practices, Estimates, and Significant Unusual Transactions

.12       The auditor should communicate to the audit committee the following matters:

1. Significant accounting policies and practices.¹⁵
1. Management's initial selection of, or changes in, significant accounting policies or the application of such policies in the current period; and
2. The effect on financial statements or disclosures of significant accounting policies in (i) controversial areas or (ii) areas for which there is a lack of authoritative guidance or consensus, or diversity in practice.
2. Critical accounting policies and practices. All critical accounting policies and practices to be used, including:¹⁶
1. The reasons certain policies and practices are considered critical; and
2. How current and anticipated future events might affect the determination of whether certain policies and practices are considered critical.

Note:  Critical accounting policies and practices, as defined in Appendix A, are a company's accounting policies and practices that are both most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Critical accounting policies and practices are tailored to specific events in the current year, and the accounting policies and practices that are considered critical might change from year to year.

3. Critical accounting estimates. 
1. A description of the process management used to develop critical accounting estimates;¹⁷
2. Management's significant assumptions used in critical accounting estimates that have a high degree of subjectivity;¹⁸ and
3. Any significant changes management made to the processes used to develop critical accounting estimates or significant assumptions, a description of management's reasons for the changes, and the effects of the changes on the financial statements. ¹⁹
4. Significant unusual transactions.
1. Significant transactions that are outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size, or nature;²⁰ and
2. The policies and practices management used to account for significant unusual transactions.

Note:  As part of its communications to the audit committee, management might communicate some or all of the matters in paragraph .12. If management communicates any of these matters, the auditor does not need to communicate them at the same level of detail as management, as long as the auditor (1) participated in management's discussion with the audit committee, (2) affirmatively confirmed to the audit committee that management has adequately communicated these matters, and (3) with respect to critical accounting policies and practices, identified for the audit committee those accounting policies and practices that the auditor considers critical. The auditor should communicate any omitted or inadequately described matters to the audit committee.

Auditor's Evaluation of the Quality of the Company's Financial Reporting

.13       The auditor should communicate to the audit committee the following matters:

1. Qualitative aspects of significant accounting policies and practices.
1. The results of the auditor's evaluation of, and conclusions about, the qualitative aspects of the company's significant accounting policies and practices, including situations in which the auditor identified bias in management's judgments about the amounts and disclosures in the financial statements;²¹ and
2. The results of the auditor's evaluation of the differences between (i) estimates best supported by the audit evidence and (ii) estimates included in the financial statements, which are individually reasonable, that indicate a possible bias on the part of the company's management.²²
2. Assessment of critical accounting policies and practices. The auditor's assessment of management's disclosures related to the critical accounting policies and practices, along with any significant modifications to the disclosure of those policies and practices proposed by the auditor that management did not make.
3. Conclusions regarding critical accounting estimates. The basis for the auditor's conclusions regarding the reasonableness of the critical accounting estimates.²³
4. Significant unusual transactions. The auditor's understanding of the business purpose (or the lack thereof) of significant unusual transactions.²⁴
5. Financial statement presentation. The results of the auditor's evaluation of whether the presentation of the financial statements and the related disclosures are in conformity with the applicable financial reporting framework, including the auditor's consideration of the form, arrangement, and content of the financial statements (including the accompanying notes), encompassing matters such as the terminology used, the amount of detail given, the classification of items, and the bases of amounts set forth.²⁵
6. New accounting pronouncements. Situations in which, as a result of the auditor's procedures, the auditor identified a concern regarding management's anticipated application of accounting pronouncements that have been issued but are not yet effective and might have a significant effect on future financial reporting.
7. Alternative accounting treatments. All alternative treatments permissible under the applicable financial reporting framework for policies and practices related to material items that have been discussed with management, including the ramifications of the use of such alternative disclosures and treatments and the treatment preferred by the auditor.²⁶

Other Information in Documents Containing Audited Financial Statements

.14       When other information is presented in documents containing audited financial statements, the auditor should communicate to the audit committee the auditor's responsibility under PCAOB rules and standards for such information, any related procedures performed, and the results of such procedures.²⁷

Difficult or Contentious Matters for which the Auditor Consulted

.15       The auditor should communicate to the audit committee matters that are difficult or contentious for which the auditor consulted outside the engagement team^27A and that the auditor reasonably determined are relevant to the audit committee's oversight of the financial reporting process.

Management Consultation with Other Accountants

.16       When the auditor is aware that management consulted with other accountants about significant auditing or accounting matters and the auditor has identified a concern regarding such matters, the auditor should communicate to the audit committee his or her views about such matters that were the subject of such consultation.

Going Concern

.17       The auditor should communicate to the audit committee, when applicable, the following matters relating to the auditor's evaluation of the company's ability to continue as a going concern:²⁸

1. If the auditor believes there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time, the conditions and events that the auditor identified that, when considered in the aggregate, indicate that there is substantial doubt;²⁹
2. If the auditor concludes, after consideration of management's plans, that substantial doubt about the company's ability to continue as a going concern is alleviated, the basis for the auditor's conclusion, including elements the auditor identified within management's plans that are significant to overcoming the adverse effects of the conditions and events;³⁰
3. If the auditor concludes, after consideration of management's plans, that substantial doubt about the company's ability to continue as a going concern for a reasonable period of time remains:³¹

1. The effects, if any, on the financial statements and the adequacy of the related disclosure;³² and
2. The effects on the auditor's report.³³

Uncorrected and Corrected Misstatements

.18       The auditor should provide the audit committee with the schedule of uncorrected misstatements related to accounts and disclosures³⁴ that the auditor presented to management.³⁵ The auditor should discuss with the audit committee, or determine that management has adequately discussed with the audit committee, the basis for the determination that the uncorrected misstatements were immaterial, including the qualitative factors³⁶ considered. The auditor also should communicate that uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even if the auditor has concluded that the uncorrected misstatements are immaterial to the financial statements under audit.

.19       The auditor should communicate to the audit committee those corrected misstatements, other than those that are clearly trivial,³⁷ related to accounts and disclosures that might not have been detected except through the auditing procedures performed, and discuss with the audit committee the implications that such corrected misstatements might have on the company's financial reporting process.

Material Written Communications

.20       The auditor should communicate to the audit committee other material written communications between the auditor and management.³⁸

The Auditor's Report

.21       The auditor should provide to and discuss with the audit committee a draft of the auditor's report.

Disagreements with Management

.22       The auditor should communicate to the audit committee any disagreements with management about matters, whether or not satisfactorily resolved, that individually or in the aggregate could be significant to the company's financial statements or the auditor's report. Disagreements with management do not include differences of opinion based on incomplete facts or preliminary information that are later resolved by the auditor obtaining additional relevant facts or information prior to the issuance of the auditor's report.

Difficulties Encountered in Performing the Audit

.23       The auditor should communicate to the audit committee any significant difficulties encountered during the audit. Significant difficulties encountered during the audit include, but are not limited to:

1. Significant delays by management, the unavailability of company personnel, or an unwillingness by management to provide information needed for the auditor to perform his or her audit procedures;
2. An unreasonably brief time within which to complete the audit;
3. Unexpected extensive effort required by the auditor to obtain sufficient appropriate audit evidence;
4. Unreasonable management restrictions encountered by the auditor on the conduct of the audit; and
5. Management's unwillingness to make or extend its assessment of the company's ability to continue as a going concern when requested by the auditor.

Note:  Difficulties encountered by the auditor during the audit could represent a scope limitation,³⁹ which may result in the auditor modifying the auditor's opinion or withdrawing from the engagement.

Other Matters

.24       The auditor should communicate to the audit committee other matters arising from the audit that are significant to the oversight of the company's financial reporting process. This communication includes, among other matters, complaints or concerns regarding accounting or auditing matters that have come to the auditor's attention during the audit and the results of the auditor's procedures regarding such matters.⁴⁰

Form and Documentation of Communications

.25       The auditor should communicate to the audit committee the matters in this standard, either orally or in writing, unless otherwise specified in this standard. The auditor must document the communications in the work papers, whether such communications took place orally or in writing.⁴²

Note:  If, as part of its communications to the audit committee, management communicated some or all of the matters identified in paragraphs .12 or .18 and, as a result, the auditor did not communicate these matters at the same level of detail as management, the auditor must include a copy of or a summary of management's communications provided to the audit committee in the audit documentation.

Timing

.26       All audit committee communications required by this standard should be made in a timely manner and prior to the issuance of the auditor's report.⁴³ The appropriate timing of a particular communication to the audit committee depends on factors such as the significance of the matters to be communicated and corrective or follow-up action needed, unless other timing requirements are specified by PCAOB rules or standards or the securities laws.

Note:  An auditor may communicate to only the audit committee chair if done in order to communicate matters in a timely manner during the audit. The auditor, however, should communicate such matters to the audit committee prior to the issuance of the auditor's report.

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Appendix A - Definitions

.A1       For purposes of this standard, the terms listed below are defined as follows:

.A2       Audit committee - A committee (or equivalent body) established by and among the board of directors of a company for the purpose of overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company; if no such committee exists with respect to the company, the entire board of directors of the company.

For audits of nonissuers, if no such committee or board of directors (or equivalent body) exists with respect to the company, the person(s) who oversee the accounting and financial reporting processes of the company and audits of the financial statements of the company.

.A3       Critical accounting estimate - An accounting estimate where (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.

.A4       Critical accounting policies and practices - A company's accounting policies and practices that are both most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

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Appendix B - Communications with Audit Committees Required by Other PCAOB Rules and Standards

This appendix identifies other PCAOB rules and standards related to the audit that require communication of specific matters between the auditor and the audit committee.

• AS 6115, Reporting on Whether a Previously Reported Material Weakness Continues to Exist, paragraphs .60, .62, and .64
• AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, paragraphs .78-.81, .91, .C7, and .C14
• AS 2110, Identifying and Assessing Risks of Material Misstatement, paragraphs .05f and .54-.57
• AS 2410, Related Parties , paragraphs .07 and .19 
  
• Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers, paragraphs 34 and 35
• Attestation Standard No. 2, Review Engagement Regarding Exemption Reports of Brokers and Dealers, paragraph 15
• PCAOB Rule 3524, Audit Committee Pre-approval of Certain Tax Services
• PCAOB Rule 3525, Audit Committee Pre-approval of Non-audit Services Related to Internal Control Over Financial Reporting
• PCAOB Rule 3526, Communication with Audit Committees Concerning Independence
• AS 2401, Consideration of Fraud in a Financial Statement Audit, paragraphs .79-.81
• AS 2405, Illegal Acts by Clients, paragraphs .08, .17, and .20
• AS 1305, Communications About Control Deficiencies in an Audit of Financial Statements, paragraphs .04-.07 and .09
• AS 2805, Management Representations, paragraph .05
• AS 2710, Other Information in Documents Containing Audited Financial Statements, paragraphs .04 and .06
• AS 4101, Responsibilities Regarding Filings Under Federal Securities Statutes, paragraph .13
• AS 4105, Reviews of Interim Financial Information, paragraphs .08-.09, .30-.31, and .33-.36
• AS 2310, The Auditor’s Use of Confirmation, paragraph .28

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Appendix C - Matters Included in the Audit Engagement Letter

.C1       The auditor should include the following matters in the engagement letter.¹ The auditor's description of these matters will vary depending on whether the auditor is engaged in a financial statement audit or in an audit of internal control over financial reporting that is integrated with an audit of financial statements ("integrated audit").

1. The objective of the audit is:
   1. Integrated audit: The expression of an opinion on both the effectiveness of internal control over financial reporting and the financial statements.
   2. Audit of financial statements: The expression of an opinion on the financial statements.
2. Auditor's responsibilities:
   1. The auditor is responsible for conducting the audit in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that the auditor:
      1. Integrated audit: Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Accordingly, there is some risk that a material misstatement of the financial statements or a material weakness in internal control over financial reporting would remain undetected. Although not absolute assurance, reasonable assurance is a high level of assurance. Also, an integrated audit is not designed to detect error or fraud that is immaterial to the financial statements or deficiencies in internal control over financial reporting that, individually or in combination, are less severe than a material weakness. If, for any reason, the auditor is unable to complete the audit or is unable to form or has not formed an opinion, he or she may decline to express an opinion or decline to issue a report as a result of the engagement.
      2. Audit of financial statements: Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, there is some risk that a material misstatement would remain undetected. Although not absolute assurance, reasonable assurance is a high level of assurance. Also, a financial statement audit is not designed to detect error or fraud that is immaterial to the financial statements. If, for any reason, the auditor is unable to complete the audit or is unable to form or has not formed an opinion, he or she may decline to express an opinion or decline to issue a report as a result of the engagement.
   2. An audit includes:
      1. Integrated audit: In fulfillment of the responsibilities noted above, the auditor communicates:
         1. To the audit committee and management: all material weaknesses in internal control over financial reporting identified during the audit, in writing.
         2. To the audit committee: all significant deficiencies identified during the audit, in writing, and informs the audit committee when the auditor has informed management of all internal control deficiencies.
         3. To management: all internal control deficiencies identified during the audit and not previously communicated in writing by the auditor or by others, including internal auditors or others within the company.
         4. To the board of directors: any conclusion that the audit committee's oversight of the company's external financial reporting and internal control over financial reporting is ineffective, in writing.
      2. Audit of financial statements: Obtaining an understanding of internal control sufficient to plan the audit and to determine the nature, timing, and extent of audit procedures to be performed. ² An audit of financial statements is not designed to provide assurance on internal control or to identify internal control deficiencies. However, the auditor is responsible for communicating:
         1. To the audit committee and management: all significant deficiencies and material weaknesses identified during the audit, in writing.
         2. To the board of directors: if the auditor becomes aware that the oversight of the company's external financial reporting and internal control over financial reporting by the audit committee is ineffective, that conclusion, in writing.
3. Management's responsibilities:
   1. Management is responsible for the company's financial statements, including disclosures.
   2. Management is responsible for establishing and maintaining effective internal control over financial reporting.
   3. Management is responsible for identifying and ensuring that the company complies with the laws and regulations applicable to its activities.
   4. Management is responsible for making all financial records and relevant information available to the auditor.
   5. At the conclusion of the engagement, management will provide the auditor with a letter that confirms certain representations made during the audit.
   6. Management is responsible for adjusting the financial statements to correct material misstatements relating to accounts or disclosures and for affirming to the auditor in the representation letter that the effects of any uncorrected misstatements aggregated by the auditor are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

.C2       In connection with a review of interim financial information, to confirm and document the understanding, the auditor should either: (a) document in the audit engagement letter the nature and objectives of the engagement to review interim financial information and the responsibilities of management and the auditor or (b) issue a separate engagement letter that addresses such matters.³