[The following paragraphs of AS 2810, amended to read as follows, will be effective for audits of fiscal years ending on or after December 15, 2017. See PCAOB Release No. 2017-001.PDF The current standard can be found here.]

.17     Evaluation of the Effect of Uncorrected Misstatements. The auditor should evaluate whether uncorrected misstatements are material, individually or in combination with other misstatements. In making this evaluation, the auditor should evaluate the misstatements in relation to the specific accounts and disclosures involved and to the financial statements as a whole, taking into account relevant quantitative and qualitative factors.(See Appendix B.)

Note: In interpreting the federal securities laws, the Supreme Court of the United States has held that a fact is material if there is "a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."8 As the Supreme Court has noted, determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him. . . ."9

Note: As a result of the interaction of quantitative and qualitative considerations in materiality judgments, uncorrected misstatements of relatively small amounts could have a material effect on the financial statements. For example, an illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility10 that it could lead to a material contingent liability or a material loss of revenue.11 Also, a misstatement made intentionally could be material for qualitative reasons, even if relatively small in amount.

Note: If the reevaluation of the established materiality level or levels, as set forth in AS 2105,12 results in a lower amount for the materiality level or levels, the auditor should take into account that lower materiality level or levels in the evaluation of uncorrected misstatements.

7     If the financial statements contain material misstatements, AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, indicates that the auditor should issue a qualified or an adverse opinion on the financial statements. AS 3105.18 discusses situations in which the financial statements are materially affected by a departure from the applicable financial reporting framework.

8     TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

9     TSC Industries, 426 U.S. at 450. 

10     There is a reasonable possibility of an event, as used in this standard, when the likelihood of the event is either "reasonably possible" or "probable," as those terms are used in the FASB Accounting Standards Codification, Contingencies Topic, paragraph 450-20-25-1.

11     AS 2405, Illegal Acts by Clients.

12     AS 2105.11-.12.

.31     As part of the evaluation of the presentation of the financial statements, the auditor should evaluate whether the financial statements contain the information essential for a fair presentation of the financial statements in conformity with the applicable financial reporting framework. Evaluation of the information disclosed in the financial statements includes 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 in the statements, and the bases of amounts set forth.

Note: According to AS 3105, if the financial statements, including the accompanying notes, fail to disclose information that is required by the applicable financial reporting framework, the auditor should express a qualified or adverse opinion and should provide the information in the report, if practicable, unless its omission from the report is recognized as appropriate by a specific auditing standard.18

18     AS 3105.24–.27.

.35     If the auditor has not obtained sufficient appropriate audit evidence about a relevant assertion or has substantial doubt about a relevant assertion, the auditor should perform procedures to obtain further audit evidence to address the matter. If the auditor is unable to obtain sufficient appropriate audit evidence to have a reasonable basis to conclude about whether the financial statements as a whole are free of material misstatement, AS 3105 indicates that the auditor should express a qualified opinion or a disclaimer of opinion.21

21     AS 3105.05–.17 contains requirements regarding audit scope limitations.

Appendix B - Qualitative Factors Related to the Evaluation of the Materiality of Uncorrected Misstatements

.B1     Paragraph .17 of this standard states:

The auditor should evaluate whether uncorrected misstatements are material, individually or in combination with other misstatements. In making this evaluation, the auditor should evaluate the misstatements in relation to the specific accounts and disclosures involved and to the financial statements as a whole, taking into account relevant quantitative and qualitative factors.1

Note: In interpreting the federal securities laws, the Supreme Court of the United States has held that a fact is material if there is "a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."2 As the Supreme Court has noted, determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him. . . ."3

Note: As a result of the interaction of quantitative and qualitative considerations in materiality judgments, uncorrected misstatements of relatively small amounts could have a material effect on the financial statements. For example, an illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility4 that it could lead to a material contingent liability or a material loss of revenue.5 Also, a misstatement made intentionally could be material for qualitative reasons, even if relatively small in amount.

1     If the financial statements contain material misstatements, AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, indicates that the auditor should issue a qualified or an adverse opinion on the financial statements. AS 3105.18 discusses situations in which the financial statements are materially affected by a departure from the applicable financial reporting framework.

2     TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

3     TSC Industries, 426 U.S. at 450.

4     There is a reasonable possibility of an event, as used in this standard, when the likelihood of the event is either "reasonably possible" or "probable," as those terms are used in the FASB Accounting Standards Codification, Contingencies Topic, paragraph 450-20-25-1.

5     AS 2405, Illegal Acts by Clients. 

Appendix C - Matters That Might Affect the Assessment of Fraud Risks

.C1     If the following matters are identified during the audit, the auditor should take into account these matters in the evaluation of the assessment of fraud risks, as discussed in paragraph .28 of this standard:

  1. Discrepancies in the accounting records, including:
    (1) Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification, or company policy.
    (2) Unsupported or unauthorized balances or transactions.
    (3) Last-minute adjustments that significantly affect financial results.
    (4) Evidence of employees' access to systems and records that is inconsistent with the access that is necessary to perform their authorized duties.
    (5) Tips or complaints to the auditor about alleged fraud.
  2. Conflicting or missing evidence, including:
    (1) Missing documents.
    (2) Documents that appear to have been altered.1
    (3) Unavailability of other than photocopied or electronically transmitted documents when documents in original form are expected to exist.
    (4) Significant unexplained items in reconciliations.
    (5) Inconsistent, vague, or implausible responses from management or employees arising from inquiries or analytical procedures.
    (6) Unusual discrepancies between the company's records and confirmation responses.
    (7) Missing inventory or physical assets of significant magnitude.
    (8) Unavailable or missing electronic evidence that is inconsistent with the company's record retention practices or policies.
    (9) Inability to produce evidence of key systems development and program change testing and implementation activities for current year system changes and deployments.
    (10) Unusual balance sheet changes or changes in trends or important financial statement ratios or relationships, e.g., receivables growing faster than revenues.
    (11) Large numbers of credit entries and other adjustments made to accounts receivable records.
    (12) Unexplained or inadequately explained differences between the accounts receivable subsidiary ledger and the general ledger control account, or between the customer statement and the accounts receivable subsidiary ledger.
    (13) Missing or nonexistent cancelled checks in circumstances in which cancelled checks are ordinarily returned to the company with the bank statement.
    (14) Fewer responses to confirmation requests than anticipated or a greater number of responses than anticipated.
  3. Problematic or unusual relationships between the auditor and management, including:
    (1) Denial of access to records, facilities, certain employees, customers, vendors, or others from whom audit evidence might be sought, including:2
    • Unwillingness to facilitate auditor access to key electronic files for testing through the use of computer-assisted audit techniques.
    • Denial of access to key information technology operations staff and facilities, including security, operations, and systems development.
    (2) Undue time pressures imposed by management to resolve complex or contentious issues.
    (3) Management pressure on engagement team members, particularly in connection with the auditor's critical assessment of audit evidence or in the resolution of potential disagreements with management.
    (4) Unusual delays by management in providing requested information.
    (5) Management's unwillingness to add or revise disclosures in the financial statements to make them more complete and transparent.
    (6) Management's unwillingness to appropriately address significant deficiencies in internal control on a timely basis.
  4. Other matters, including:
    (1) Objections by management to the auditor meeting privately with the audit committee.
    (2) Accounting policies that appear inconsistent with industry practices that are widely recognized and prevalent.
    (3) Frequent changes in accounting estimates that do not appear to result from changing circumstances.
    (4) Tolerance of violations of the company's code of conduct.

1     Paragraph .09 of AS 1105, Audit Evidence.

2     Denial of access to information might constitute a limitation on the scope of the audit that requires the auditor to qualify or disclaim an opinion. (See AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, and AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances.)

[Effective pursuant to SEC Release No. 34-81916, File No. PCAOB-2017-01 (October 23, 2017)]