PCAOB Adopts Changes to the Auditor's Report
On June 1, 2017, the PCAOB adopted a new auditing standard1 on the auditor’s report (the “standard” or
“release”). While retaining the current “pass/fail” opinion of the existing
auditor’s report, the standard includes several significant modifications, which are
discussed below. These changes are intended to increase the informational value,
usefulness, and relevance of the auditor’s report.
In a statement announcing the standard, PCAOB Chairman James Doty
stated the following:
[The new standard]
will make the auditor’s report more relevant, useful and informative to
investors and other financial statement users in light of the progress of
history. The new standard will breathe new life into a formulaic reporting
model.
At the same meeting, PCAOB Board member Steve Harris stated the following:
Today’s action is a direct response to calls from investors for the Board
to expand the auditor’s report to include information about the difficult
parts of the audit, and information that the auditor gained from the audit
that he or she would like to know as an investor — basically what “kept the
auditor awake at night.”
The PCAOB will submit the new auditor reporting standard and related
amendments to the SEC for its consideration. The SEC’s approval process typically
includes an additional public comment period. This Heads Up provides an
overview of the standard.
Key Changes to the Auditor’s Report
The key changes to the auditor’s report under the standard
are:
- Standardized ordering and inclusion of section headers, with the opinion section appearing first.
- Enhanced descriptions of the auditor’s role and responsibilities, including a statement regarding independence requirements.
- Communication of critical audit matters (CAMs).
- Disclosure of auditor tenure — The year in which the auditor began serving consecutively as the company’s auditor.
PCAOB Chief Auditor and Director of Professional Standards
Martin Baumann stated his belief that:
[T]his new auditor reporting standard will make the
audit report more informative and relevant, adding to the total mix of
information that investors use to make investment
decisions.
Appendix A
contains an example of an illustrative auditor’s unqualified report that
highlights the changes to the current report. The final standard is not
significantly different from the requirements and guidance previously
proposed by the PCAOB in May 2016 (the “2016 reproposal”).
In developing the standard, the PCAOB considered feedback
received from comment letters, roundtables, public outreach activities, and
discussions with its advisory groups.2 In addition, the Board considered the efforts
undertaken by several international and non-U.S. standard setters and
regulators.
Appendix B
compares various aspects of the PCAOB’s standard to similar requirements adopted
by the International Auditing and Assurance Standards Board (IAASB), the
European Union (EU), and the Financial Reporting Council in the United Kingdom
(FRC).
Communication of CAMs
Overview of CAMs
A CAM is defined in the standard as “any matter arising from
the audit of the financial statements that was communicated or required to
be communicated to the audit committee and that relates to accounts or
disclosures that are material to the financial statements and involved
especially challenging, subjective, or complex auditor
judgment.”
The release also states that CAMs could include matters that
were (1) required to be communicated to the audit committee and (2) actually
communicated, even if not required.
Editor’s Note
We believe the requirements in the new standard for
determining CAMs allow the auditor to identify and communicate those
matters that would be of most interest and importance to investors.
In particular, we support the steps the auditor takes to identify
CAMs, beginning with the population of those matters that were
communicated or required to be communicated to the audit committee,
and then identifying those matters that relate to accounts or
disclosures that are material to the financial statements and
involved especially challenging, subjective, or complex auditor
judgment. PCAOB AS 1301, Communications With Audit
Committees, and other applicable rules and standards require
communication to the audit committee of matters arising from the
audit that are relevant to the audit committee’s oversight of the
financial reporting process.
Further, the standard includes a nonexclusive list of
factors for the auditor to take into account, alone or in combination, in
determining whether a matter involved especially challenging, subjective, or
complex auditor judgment. (See Appendix C for an illustration of the process for determining
CAMs.)
Editor’s Note
We support the inclusion of the nonexclusive list of
factors provided in the final standard and their use in determining
whether a matter involved especially challenging, subjective, or
complex auditor judgment. Some comments received on the 2016
reproposal suggested that the selection of CAMs from the matters
that involved “especially challenging, subjective, or complex
auditor judgment” will depend on the auditor’s experience and skill
level and may result in inconsistent application of the requirements
of the standard, potentially leading to investor confusion. The
PCAOB explained that the CAM definition is grounded in “auditor’s
expertise and judgment, which is directly responsive to investor
requests for information from the auditor’s point of view.”
The release further explains that the determination
of CAMs “is principles-based and the final standard does not specify
any items that would always constitute [CAMs].” For example, the
standard does not provide that all matters determined to be
“significant risks”3 under
PCAOB standards would be CAMs, because not every significant risk
would necessarily involve “especially challenging, subjective, or
complex auditor judgment.”
Auditor Reporting of CAMs
CAMs will be identified and described in a separate section
in the auditor’s report titled “Critical Audit Matters.” Specific language
will precede the description of the CAMs, stating that (1) CAMs do not alter
the opinion on the financial statements and (2) the auditor is not providing
a separate opinion on the CAMs or the accounts or disclosures to which they
relate. The release states that for each CAM communicated in the auditor’s
report, the auditor will be required to:
- “Identify the [CAM].”
- “Describe the principal considerations that led the auditor to determine that the matter is a [CAM].”
- “Describe how the [CAM] was addressed in the audit.”
- “Refer to the relevant financial statement accounts or disclosures that relate to the [CAM].”
The release also states that the determination of a CAM
“should be made in the context of [a] particular audit, with the aim of
providing audit-specific information rather than a discussion of generic
risks.” It is expected that in most audits to which the CAM requirements
apply (see applicability information below), the auditor would identify at
least one CAM. If no CAMs are identified, the auditor would be required to
make a statement to that effect in the auditor’s report.
Editor’s Note
In their comment letters on the 2016 reproposal,
some investors that supported CAM disclosures suggested further
modifications to the auditor’s report, such as including the
auditor’s assessment of the significant accounting judgments and
management estimates and requiring auditors to describe specific
insights and findings related to each CAM (i.e., disclose the
results of the auditor’s procedures with respect to CAMs). The
release explains that communication of the auditor’s findings is not
required, but “the auditor may choose to include findings as an
indication of the outcome of audit procedures or key observations
about a matter” as such information may be valuable to
investors.
In addition, some commenters on the 2016 reproposal
expressed concern that the auditor may be in the position of
communicating original information about the company (e.g., matters
related to significant deficiencies in internal control that are
required to be communicated to management and the audit committee
but not externally). The release explains that through its
definition of a CAM, the PCAOB is attempting to strike an
appropriate balance between investor demands for enhanced
communication about the audit and potential unintended consequences
associated with providing it. The PCAOB notes, and we agree, that
because each CAM relates to accounts or disclosures that are
material to the financial statements, a matter that does not relate
to accounts or disclosures that are material to the financial
statements cannot be a CAM. In addition, the release states that
while the auditor is required to describe the principal
considerations that led the auditor to determine that the matter is
a CAM, the auditor may do so in general terms (e.g., if a
significant deficiency was among the principal considerations in
determining that a matter was a CAM, the auditor may describe the
relevant control issues that relate to the matter in the broader
context of the CAM without using the term “significant
deficiency”).4
See Appendix
D for illustrative examples of communication of CAMs based on the
examples in the 2016 reproposal.
Period Covered
In the final standard, the Board has retained the
requirement to communicate CAMs only for the current audit period. However,
the auditor would not be precluded from including CAMs for prior periods.5
Documentation of CAMs
The standard states that for each matter arising from the
audit that both (1) was communicated or required to be communicated to the
audit committee and (2) relates to accounts or disclosures that are material
to the financial statements, the auditor is required to document whether or
not the matter was determined to be a CAM (i.e., involved especially
challenging, subjective, or complex auditor judgment) and the basis for such
determination. The release specifies that the amount of documentation may
vary but should be sufficient to facilitate review by others, including the
engagement quality control reviewer.
Auditor Tenure
The standard requires the auditor to include a statement in the
auditor’s report containing the year the auditor began serving consecutively as
the company’s auditor; however, the location for this statement in the auditor’s
report is not prescribed.
Editor’s Note
In the release, the PCAOB acknowledges that many issuers
are already voluntarily disclosing auditor tenure in their proxy
statements for annual meetings of shareholders. Deloitte’s
review of S&P 100 proxy disclosures in 2016
showed that 67 percent of companies in the S&P 100 currently
disclose information about audit firm tenure.6
The PCAOB explains in its release that disclosure of
audit firm tenure is intended to add to the mix of publicly available
information. It is not intended to create an inference either positively
or negatively. In recent remarks at the 36th Annual SEC and Financial
Reporting Institute Conference held at the University of Southern
California, at which the new requirement was addressed, SEC Chief
Accountant Wesley Bricker stated that:
[T]he years of experience may be one of the
many factors considered by audit committees in their selection
and oversight of the external auditor. In doing so, for example,
an audit committee might consider an audit firm’s prior service
experience in contributing to the firm’s understanding of the
company’s business and audit risks. And, also, an audit
committee may want to incorporate prior auditor service into its
oversight of the auditor’s expertise, incentives and,
ultimately, appropriate performance in the conduct of the
audit.
Effective Date
The effective date (pending SEC approval) will be phased in as
follows:
- All changes except for communication of CAMs:
- Audits of fiscal years ending on or after December 15, 2017.
- Communication of CAMs:
- Audits of large accelerated filers (as defined by the SEC7): fiscal years ending on or after June 30, 2019.
- Audits of all other companies: fiscal years ending on or after December 15, 2020.
However, the release states that auditors may elect to comply
with the standard before its effective date at any point after SEC approval.
Applicability
Communication of CAMs is not required for audits of brokers and
dealers reporting under Rule 17a-5 of the Securities Exchange Act of 1934 (the
“Exchange Act”); investment companies registered under the Investment Company
Act of 1940, other than business development companies; employee stock purchase,
savings, and similar plans; and emerging growth companies as defined in Section
3(a)(80) of the Exchange Act. However, the standard permits voluntary inclusion
of CAMs in the auditor’s report for such entities. Note that all other
provisions of the standard apply to the audits of these entities.
Considerations for Management and Audit Committees
Although the standard is subject to SEC approval and would be
implemented in accordance with phased-in effective dates, management and audit
committees will most likely want to start to consider the implications of the
new requirements and discuss them with their auditors. Potential questions
regarding CAMs may include the following:
- What matters could be CAMs?
- How will management and audit committees engage with the auditor as CAMs are identified and the auditor’s descriptions of the CAMs are developed and finalized?
- How will the timing of auditor communications with management and the audit committee accommodate the discussion of CAMs?
- How do the auditor’s statements regarding CAMs compare to management’s disclosures regarding the same matters?
Appendix A — Example of an Auditor’s Unqualified Report on an Audit of Financial Statements
The following example of an auditor’s unqualified report on an
audit of financial statements illustrates the changes effected by the standard.
New text is underlined and changes are explained in the margins.8
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of X
Company
Appendix B — Comparison of Auditor Reporting Standards
The following table summarizes key aspects of auditor reporting
requirements under different standards and regulations. The various requirements
in different jurisdictions are not expected to result in vastly different
reporting by auditors. For example, when the FRC completed its implementation of
the EU Audit Regulation and Directive and alignment with the IAASB’s standards,
it stated that it did not expect the incorporation of its own requirements and
those of the EU to result in an increase in the number of key audit matters
(KAMs) communicated in the auditor’s report over what would be required by the
IAASB standard alone.
Also, in its release, the PCAOB acknowledged that while there
are differences in the processes of identifying matters to be communicated
across jurisdictions, there are “commonalities in the underlying criteria . . .
such that expanded auditor reporting could result in the communication of many
of the same matters under the various approaches.”
Topic | Topic | IAASB | EU | FRC |
|---|---|---|---|---|
Effective Date | Phased9 | December 15, 201610 | June
201611 | June
17, 201612 |
Definition |
CAMs are selected from
matters communicated or required to be communicated to
the audit committee. | KAMs:
Those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the
financial statements in the current period. KAMs are selected from matters
communicated with those charged with
governance. | Matters required to be disclosed in the auditor’s
report are those that were assessed as the most
significant assessed risks of material misstatement,
including assessed risks of material misstatement due to
fraud. | KAMs:
Those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the
financial statements in the current period. KAMs are selected from matters
communicated with those charged with
governance. |
Determination of whether a matter is a
KAM/CAM | Based
on a nonexclusive list of factors such as the auditor’s
assessment of the risks of material misstatement,
including significant risks. | Based
on a two-step process by (1) identifying the matters
communicated with those charged with governance that
required significant auditor attention and (2) of those
matters, identifying the ones of most significance in
the audit as KAMs. | Not
specifically addressed. | Based
on a two-step process by (1) identifying the matters
communicated with those charged with governance that
required significant auditor attention and (2) of those
matters, identifying the ones of most significance in
the audit as KAMs. |
Period covered | Current period only, although can include prior periods
at the auditor’s option. | Current period only. | Does
not specify. | Current period only. |
Communication requirements | For
each CAM, the auditor must:
If there are no CAMs,
requires a statement to that effect. | The
description of a KAM in the auditor’s report requires a
reference to the related disclosures, if any, and should
address:
If there are no KAMs,
requires a statement to that effect. | The
audit report is required to include:
Where relevant to the above
information provided in the audit report concerning each
significant assessed risk of material misstatement, the
auditor’s report shall include a clear reference to the
relevant disclosures in the financial
statements. | The
description of a KAM in the auditor’s report requires a
reference to the related disclosures, if any, and should
address:
If there are no KAMs,
requires a statement to that effect. |
Communicating other planning, materiality, and scoping
matters | Requires13disclosure of
other accounting firms participating in the audit in
Form AP, which is submitted to the PCAOB by registered
public accounting firms. The information will be
available on the PCAOB’s Web site. | Does
not specify. | Does
not specify. |
|
Audit
documentation requirements | If a
matter both (1) was communicated or required to be
communicated to the audit committee and (2) relates to
accounts or disclosures that are material to the
financial statements, the auditor is required to
document the basis for the determination of whether or
not the matter is a CAM. | The
auditor is required to document matters that required
significant auditor attention (determined from those
matters communicated to those charged with governance)
and the rationale for the auditor’s determination of
whether or not each of these matters is a
KAM. | Does
not specify. | The
auditor is required to document matters that required
significant auditor attention (determined from those
matters communicated to those charged with governance)
and the rationale for the auditor’s determination of
whether or not each of these matters is a
KAM. |
Form | Requires the “Opinion on the Financial Statements”
section to be in the first section of the auditor’s
report, followed by the “Basis for Opinion”
section. | Requires the “Opinion” section to be in the first
section of the auditor’s report, followed by the “Basis
for Opinion” section, unless law or regulation
prescribes different placement. | Does
not specify. | Requires the “Opinion” section to be in the first
section of the auditor’s report, followed by the “Basis
for Opinion” section, unless law or regulation
prescribes different placement. |
Independence disclosure requirements | In
the “Basis for Opinion” section, a statement is required
that the auditor is:
| In
the “Basis for Opinion” section, a statement is required
that the auditor is independent of the entity in
accordance with the relevant ethical requirements
relating to the audit and has fulfilled the auditor’s
other ethical responsibilities in accordance with these
requirements. | A
statement is required that the auditor remained
independent of the audited entity in conducting the
audit. | In
the “Basis for Opinion” section, a statement is required
that the auditor is independent of the entity in
accordance with the relevant ethical requirements
relating to the audit, including the FRC’s Ethical
Standards for auditors, and has fulfilled the auditor’s
other ethical responsibilities in accordance with these
requirements. |
Description of auditor’s responsibilities | Requires the phrase “whether due to error or fraud” in
the statement describing the auditor’s responsibilities
under PCAOB standards to obtain reasonable assurance
about whether the financial statements are free of
material misstatement. | Requires an expanded description of the
responsibilities of management and those charged with
governance, as well as the auditor’s responsibilities,
including the phrase “whether due to fraud or error,”
and the key features of an audit. | Requires an explanation of the extent to which the
audit was considered capable of detecting
irregularities, including fraud. | Requires an expanded description of the
responsibilities of management and those charged with
governance, as well as the auditor’s responsibilities,
including the phrase “whether due to fraud or error,”
and the key features of an audit. |
Disclosure of tenure | Requires disclosure of tenure in the auditor’s
report. | No
requirement. | Requires a disclosure of the date of appointment and
the period of total uninterrupted engagement, including
previous renewals and reappointments of the statutory
auditors or the audit firms. | No
requirement (disclosed in the audit committee
report). |
Disclosure of name of the engagement
partner | Requires14
disclosure of the engagement partner’s name in Form AP,
which is submitted to the PCAOB by registered public
accounting firms. The information is available on Audit
Search, a searchable database on the PCAOB’s Web
site. | Requires the name of the engagement partner to be
included in the auditor’s report for audits of complete
sets of general-purpose financial statements of listed
entities unless, in rare circumstances, such disclosure
is reasonably expected to lead to a significant personal
security threat. | Requires the audit report to be signed by the statutory
auditor or the statutory auditor(s) carrying out the
statutory audit on behalf of the audit firm. In
exceptional circumstances, such signature(s) need not be
disclosed if such disclosure could lead to an imminent
and significant personal security threat. | Requires the name of the engagement partner to be
included in the auditor’s report on financial statements
of listed entities, unless, in rare circumstances, such
disclosure is reasonably expected to lead to a
significant personal security threat. |
Appendix C — Illustration of the Process for Determining and Reporting CAMs (Adapted From the Release)
Documentation Requirement
If a matter both (1) was communicated
or required to be communicated to the audit committee
and (2) relates to accounts or disclosures that are
material to the financial statements, the auditor is
required to document whether or not the matter was
determined to be a CAM (i.e., involved especially
challenging, subjective, or complex auditor judgment)
and the basis for such determination.
Appendix D — Examples of Critical Audit Matters
The following two illustrative examples of communication of CAMs
are based on the examples included in the 2016 reproposal. In the June 2017
release, the PCAOB explained that “[g]iven the principles-based nature of the
requirements for critical audit matters and the objective of providing tailored,
audit-specific information, the examples were intended to function as
illustrations of how critical audit matters could be communicated, and not as
templates for how critical audit matters should be communicated.” However, these
illustrative examples are not included in the release accompanying the final
standard because the PCAOB believes auditors should provide “tailored,
audit-specific information” when communicating CAMs in the auditor’s report. As
such, the examples included below are presented purely as illustrative examples
of what CAM communications might look like.
Critical Audit Matters
The critical audit matters communicated below are matters
arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that
(1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Critical Audit Matter (CAM) | Principal Considerations in Determining
CAM | How the CAM Was Addressed in the Audit |
|---|---|---|
Allowance for loan losses —
new loan product As
more fully described in Note 7 to the financial
statements, during 2014, the Company [a mid-size
regional bank] began actively marketing a nine-year
auto loan in addition to the three- and five-year
auto loans historically marketed. At December 31,
2015, the nine-year loans represented approximately
18% of the auto loan portfolio. The Company
estimates and records an allowance for loans that
are impaired but are not yet specifically identified
(collective impairment allowance) by developing a
loss rate based on historical losses and other
factors, including qualitative adjustments to
historical loss rates based on relevant market
factors. Since management has limited historical
loss data for the nine-year loans, it developed a
new model to estimate this allowance using
historical loss data from its auto loans of shorter
terms and loss data from external sources for auto
loans of longer terms to model a loss rate for the
nine-year loans. In addition, management made
qualitative adjustments to the historical loss rates
to reflect lower borrower quality and higher risk of
collateral impairment compared to its shorter term
loans and for economic factors, primarily due to
increasing unemployment in the markets served. There
was a significant amount of judgment required by
management when developing the model, which in turn
involved our significant judgment. | The principal considerations for our determination
that the allowance for loan losses for nine-year
auto loans is a critical audit matter are that it is
a new loan product with limited historical loss data
and auditing the estimated allowance for losses on
these loans involved our complex and subjective
judgment. | Our audit procedures related to the collective
impairment allowance for the nine-year loans
included the following procedures, among
others. We tested the
effectiveness of controls over the Company’s new
model, historical loss data, and the calculation of
a loss rate. We also evaluated the qualitative
adjustment to the historical loss rates, including
assessing the basis for the adjustments and the
reasonableness of the significant assumptions. We
tested the accuracy and evaluated the relevance of
the historical loss data as an input to the new
model. We used a specialist
to assist us in evaluating the appropriateness of
the new model and to review the loss data from
external sources used by the Company to determine
its relevance to the Company’s nine-year loan
portfolio and consistency with external data from
other sources. Finally, with the assistance of the
specialist, we evaluated the incorporation of the
applicable assumptions into the model and tested the
model’s computational accuracy. |
Accounting for
acquisitions Refer to
Notes 2 and 13 to the financial statements. The Company’s strategy includes
growth by acquisition. Acquisitions represent a
significant component of the Company’s sales growth
through the addition of new customers and new
products. During 2015 the Company completed eight
acquisitions for net consideration of $2.1 billion.
The most significant of these were (1) the
acquisition of all outstanding equity of ABC Inc.
for net consideration of $1.1 billion and (2) the
acquisition of all outstanding equity of XYZ Corp.
for net consideration of $0.5 billion. | Auditing the accounting for the Company’s 2015
acquisitions involved a high degree of subjectivity
in evaluating management’s estimates, such as the
recognition of the fair value of assets acquired and
liabilities assumed. | We planned and performed the following procedures
in connection with forming our overall opinion on
the financial statements. We tested controls over
the accounting for acquisitions, such as controls
over the recognition and measurement of assets
acquired, liabilities assumed, and consideration
paid and payable, including contingent
consideration. For each of the acquisitions, we read
the purchase agreements, evaluated the significant
assumptions and methods used in developing the fair
value estimates, and tested the recognition of (1)
the assets acquired and liabilities assumed at fair
value; (2) the identifiable acquired intangible
assets at fair value; and (3) goodwill measured as a
residual. More specifically,
for the acquisitions of ABC and XYZ, we assessed
whether (1) intangible assets, such as acquired
technology, customer lists, and noncompetition
agreements, were properly identified, and (2) the
significant assumptions, including discount rates,
estimated useful lives, revenue growth rates,
projected profit margins, and the expected rate of
return, used in valuing these intangibles were
reasonable. Specifically, when assessing the
assumptions related to the revenue growth rate and
projected profit margins, we evaluated whether the
assumptions used were reasonable considering the
past performance of ABC and XYZ and the Company’s
history related to similar acquisitions and
considered whether they were consistent with
evidence obtained in other areas of the audit, such
as assumptions used by the Company in its
budget. The purchase
consideration for the acquisitions of ABC and XYZ
also reflected, in part, the estimated fair value of
significant contingent consideration arrangements
based on attainment of product development
milestones and patent approvals. In testing the
valuation of contingent consideration, we assessed
the terms of the arrangements and the conditions
that must be met for the arrangements to become
payable. Finally, we evaluated management’s
classification of contingent payments to continuing
employees as either contingent consideration in the
business combination or employee
compensation. |
Footnotes
1
PCAOB Release No. 2017-001, The Auditor’s Report on an
Audit of Financial Statements When the Auditor Expresses an Unqualified
Opinion [AS 3101] and Related Amendments to PCAOB
Standards.
2
In June 2011, the PCAOB issued a concept release to
solicit comments on a number of potential changes to the auditor’s
report and held a public roundtable to obtain additional insights on the
alternatives presented in the concept release. After considering the
results of its outreach and comments on its concept release, in August
2013, the PCAOB proposed an auditing standard that included new auditor
reporting requirements, including a requirement for auditors to
communicate CAMs, and additional improvements to the auditor’s report.
In May 2016, the Board issued a reproposal of the auditor reporting
standard that further modified the proposal in several respects. Refer
to Deloitte’s June 28, 2011, and November 2, 2011, Heads
Up newsletters for summaries of the 2011 concept release and
constituent responses, respectively; September 5, 2013, Heads
Up newsletter for a summary of the 2013 proposal; and
May 27,
2016, and October 14, 2016, Audit
& Assurance Update newsletters for summary of the 2016
reproposal and the feedback received, respectively. In addition, in
April 2014 the PCAOB hosted a public meeting to obtain additional
insights from a diverse group, including investor advocates, public
companies, audit committees, audit firms, academics, and representatives
from international standard-setting organizations. See Deloitte’s April
30, 2014, Heads Up newsletter for an overview of the
discussion.
3
A significant risk is defined as a “risk of
material misstatement that requires special audit
consideration” (see paragraph .A5 of PCAOB AS 2110, Identifying and Assessing Risks of
Material Misstatement).
4
See section IV.A.1.a.ii (page 21) of the
release, which states “the determination that there is a
significant deficiency in [ICFR], in and of itself, cannot
be a [CAM]; such determination, in and of itself, does not
relate to an account or disclosure that is material to the
financial statements as no disclosure of the determination
is required.”
5
The standard states,
“When the current period’s financial statements are presented on a
comparative basis with those of one or more prior periods, the
auditor may communicate [CAMs] relating to a prior period. This may
be appropriate, for example, when (1) the prior period’s financial
statements are made public for the first time, such as in an initial
public offering, or (2) issuing an auditor’s report on the prior
period’s financial statements because the previously issued
auditor’s report could no longer be relied upon.”
6
Note that auditor tenure
disclosures in proxy statements vary; in some cases they provide
the precise length of auditor tenure, and in other cases they
provide a statement such as “XYZ has been the auditor at least
since 19XX.”
7
In general, the
term “large accelerated filer” refers to an issuer
with a public float of $700 million or more that
has been subject to Exchange Act periodic
reporting requirements for at least one year and
has filed at least one annual report. See
Rule 12b-2 of the Exchange Act
(17 CFR 240.12b-2). In addition, the definitions
of an accelerated filer and large accelerated
filer do not exclude companies that qualify as
foreign private issuers, even though the deadlines
for Forms 20-F and 40-F annual reports are not
affected by accelerated filer or large accelerated
filer status.
8
The illustrative report
assumes that the auditor also audited the company’s internal control
over financial reporting and expressed an unqualified opinion as the
result of such audit.
9
New auditor’s report format,
tenure, and other information: audits of fiscal
years ending on or after December 15, 2017;
communication of CAMs for audits of large
accelerated filers: audits of fiscal years ending
on or after June 30, 2019; communication of CAMs
for audits of all other companies to which the
requirement applies: audits of fiscal years ending
on or after December 15,
2020.
10
Refer to ISA 701,
Communicating Key Audit Matters in the
Independent Auditor’s Report, and a number of
revised ISAs, including ISA 700 (Revised),
Forming an Opinion and Reporting on Financial
Statements, and ISA 570 (Revised), Going
Concern, issued in January 2015. The IAASB has
undertaken an outreach program to support the
implementation of the IAASB’s standards, including
developing an Auditor Reporting Toolkit to
assist with the implementation of the new
standards.
11
See Regulation No. 2014 of the
European Parliament and of the Council on Specific
Requirements Regarding Statutory Auditor of
Public-Interest Entities. EU member states had
until June 2016 to adopt the provisions of the
legislation into their national law and decide on
a number of options that have been afforded to
them. Information on member state implementation
is available here.
12
In June 2013, the FRC revised its
auditor reporting requirements for entities that
apply the UK Corporate Governance Code. For audits
commencing on or after October 1, 2012, auditors
of those entities were required, among other
things, to describe the risks of material
misstatement that had the greatest effect on: (1)
the overall audit strategy; (2) the allocation of
resources in the audit; and (3) directing the
efforts of the engagement team. In addition,
auditors were required to provide an explanation
of how the scope of the audit addressed the risks.
In April 2016, the FRC adopted an update to its
2013 auditor reporting requirements. Refer to the
FRC’s Final Draft, International Standards on
Auditing (UK and Ireland) 701, Communicating
Key Audit Matters in the Independent Auditor’s
Report (April 2016). This rule is effective
for audits of financial statements for periods
beginning on or after June 17,
2016.
13
Effective for audit reports
issued on or after January 31, 2017, registered
public accounting firms are required to disclose
the engagement partner name on Form AP, which is
publicly available on the PCAOB’s Web site.
Disclosure of other accounting firms participating
in the audit is required for audit reports issued
on or after June 30, 2017.
14
See footnote 13.