PCAOB Open Board Meeting: Auditor's Reporting Model Proposal Fact Sheet
August 13, 2013
Today, the Board proposed two standards for expanded language in the auditor's report: one to require auditors to include a discussion of "critical audit matters" specific to the audit; and the other to require auditors to provide their evaluation of "other information" in a company's annual report filed with the SEC.
Communication of critical audit matters in the auditor's report is intended to make the auditor's report more informative, thus increasing its relevance and usefulness to investors and other financial statement users. The critical audit matters may provide previously unknown information about the audit that could enable investors to analyze more closely any related financial statement accounts and disclosures.
The proposed standard would retain the pass/fail model and the basic elements of the current auditor's report, but would require the auditor to communicate a wider range of information specific to the particular audit.
The proposed standard would require:
- the communication of critical audit matters as determined by the auditor
- enhancements to existing language in the auditor's report related to the auditor's responsibilities for fraud and notes to the financial statements
- the addition of new elements to the auditor's report related to:
- auditor independence
- auditor tenure
- the auditor's responsibilities for, and the results of, the auditor's evaluation of other information outside the financial statements
Critical Audit Matters
Critical audit matters are those matters the auditor addressed during the audit of the financial statements that:
- Involved the most difficult, subjective, or complex auditor judgments
- Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence
- Posed the most difficulty to the auditor in forming an opinion on the financial statements
Critical audit matters ordinarily are matters of such importance that they are:
- Included in engagement completion documents
- Reviewed by the engagement quality reviewer
- Communicated to the audit committee
Factors that the auditor should take into account in determining critical audit matters:
- The degree of subjectivity involved in determining or applying audit procedures to address the matter or in evaluating the results of those procedures
- The nature and extent of audit effort required to address the matter
- The nature and amount of available relevant and reliable evidence regarding the matter or the degree of difficulty in obtaining such evidence
- The severity of control deficiencies identified relevant to the matter, if any
- The degree to which the results of audit procedures to address the matter resulted in changes in the auditor's risk assessments, including risks that were not identified previously, or required changes to planned audit procedures, if any
- The nature and significance, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements related to the matter, if any
- The extent of specialized skill or knowledge needed to apply audit procedures to address the matter or evaluate the results of those procedures, if any
- The nature of consultations outside the engagement team regarding the matter, if any
The description for each critical audit matter in the auditor's report would:
- Identify the critical audit matter
- Describe the considerations that led the auditor to determine that the matter is a critical audit matter
- Refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter, when applicable
Proposed Other Information Standard
Under existing PCAOB standards, the auditor has a responsibility to "read and consider" other information with no related reporting requirements.
The proposed standard would:
- Apply the auditor's responsibility for other information specifically to a company's annual report filed with the Securities and Exchange Commission under the Exchange Act that contains the company's audited financial statements and the related auditor's report
- Enhance the auditor's responsibility with respect to other information by adding procedures for the auditor to perform in evaluating the other information based on relevant audit evidence obtained and conclusions reached during the audit
- Require the auditor to evaluate the other information for a material misstatement of fact as well as for a material inconsistency with amounts or information, or the manner of their presentation, in the audited financial statements
- Require communication in the auditor's report regarding the auditor's responsibilities for, and the results of, the auditor's evaluation of the other information.
Outreach
- In 2010 and 2011, PCAOB staff conducted outreach to investors, auditors, preparers of financial statements, audit committee members, and other interested parties to seek their views on potential changes to the auditor's report.
- In March 2011, the staff presented its findings to the Board at an open meeting.
- In June 2011, the Board issued a related Concept Release to seek public comment on potential changes to the auditor's reporting model. The Board received 155 comment letters.
- In September 2011, the Board held a public roundtable to obtain insight from a diverse group of investors and other financial statement users, preparers of financial statements, audit committee members, and auditors on the alternatives presented in the Concept Release.
- Dec. 11, 2013 is the deadline for comments on the proposed standards and related amendments.
- In 2014, the Board is considering holding a public roundtable to discuss the proposed standards and comments received.