PCAOB Reproposes Changes to the Auditor’s Reporting Model
May 11, 2016 — Today, the PCAOB reproposed an auditing standard on the auditor’s reporting model. Like the original proposal, the reproposal is intended to significantly enhance the auditor’s reporting model and retain the current “pass/fail” approach while increasing the amount of other information included in auditors’ reports.
One of the most significant proposed changes is a new required section of the auditor’s report describing critical audit matters (CAMs). In this new section, the auditor would identify the CAMs, describe the principal considerations that led the auditor to determine that matters are CAMs, and refer to the related financial statement accounts and disclosures. In addition, the auditor would describe how the auditor addressed the CAMs in the audit.
The reproposal narrows the definition of CAMs by (1) limiting the potential source of CAMs to those matters communicated to the audit committee and (2) clarifying that CAMs should be related to accounts or disclosures that are material to the financial statements and those matters that involved especially challenging, subjective, or complex auditor judgment. The reproposal also provides a list of factors for the auditor to take into account when determining whether a matter involved especially challenging, subjective, and complex judgment, such as the auditor’s assessment of the risks of material misstatement, including significant risks.
Under the reproposal, the requirements related to CAMs would not apply to audits of broker-dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans.
The reproprosal, like the original proposal, also calls for the addition of new elements to the auditor’s report, including statements about the requirement of auditor independence and auditor tenure. In addition, the phrase “whether due to error or fraud” would be added to the description of the auditor’s responsibilities, under PCAOB standards, to obtain reasonable assurance about whether the financial statements are free of material misstatements. The reproposal would also change the standardized form of the auditor’s report, requiring (1) the opinion to be the first section of the report and (2) the inclusion of section titles to guide the reader.
The original proposal contained enhancements related to the auditor’s responsibilities for, and the results of, the evaluation of other information outside the financial statements. The reproposal does not contain such enhancements, but the PCAOB staff is continuing to evaluate this topic on the basis of comments received on the original proposal and anticipates making a recommendation to the Board at a later date.
Comments on the reproposal are due to the PCAOB by August 15, 2016.
Watch for Deloitte’s forthcoming Audit & Assurance Update newsletter for additional analysis of the PCAOB’s reproposal.