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PCAOB Revamps Proposal to Enhance Auditor’s Report

May 12th 2016
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In a change of course, the Public Company Accounting Oversight Board (PCAOB) on May 11 opted to repropose for public comment a standard that would enhance the auditor’s report, allowing investors to glean more information from it.

Comments about the new proposal are due by Aug. 15.

“In today’s complex economy, and particularly in light of lessons learned after the financial crisis, investors want a better understanding of the judgments that go into an audit opinion,” PCAOB Chairman James Doty said in a prepared statement. “This proposal delivers on the intention of Congress to further the public interest in the preparation of more informative audit reports for public investors.”

The board is reproposing the auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments to certain other PCAOB standards.

The revised proposal would retain the pass/fail model in the existing auditor’s report, but would provide additional information in the report, such as the communication of critical audit matters arising from the audit and new elements related to auditor independence and auditor tenure.

This new plan revamps a proposal issued by the PCAOB in August 2013.

The following changes would be made to the existing auditor’s report:

  • Critical audit matters arising from the audit of the current period’s financial statements would require communication in the auditor’s report.
  • A critical audit matter would be defined as any matter communicated or required to be communicated to the audit committee that relates to accounts or disclosures material to financial statements and involves especially challenging, subjective, or complex auditor judgment.
  • In determining critical audit matters, auditors would consider a number of factors in deciding if a matter involves especially challenging, subjective, or complex auditor judgment, such as the auditor’s assessment of the risks of material misstatement, including significant risks.
  • In communicating about the critical audit matters, the auditor would identify them, describe the principal considerations that led to determining the audit matter as critical, describe how it was addressed in the audit, and refer to relevant financial statement accounts and disclosures. If no critical audit matters exist, that would be stated in the report.
  • The auditor would document the basis for the determination of whether each critical audit matter – that both was communicated or required to be communicated to the audit committee, and relates to accounts or disclosures that are material to the financial statements – involved especially challenging, subjective, or complex auditor judgment.
  • In clarifying existing auditor responsibilities, the auditor would add standardized language in the report, including a statement about the requirement for the auditor to be independent and the phrase “whether due to error or fraud,” when describing the auditor’s responsibilities under PCAOB standards to obtain reasonable assurance about whether financial statements are free of material misstatements.
  • The auditor’s report would state how long the auditor has served in that position for the company.
  • The auditor’s report would be standardized by requiring the opinion to be in the first section and section titles to guide the reader.

The reproposal generally applies to audits done under PCAOB standards.

Communication of critical audit matters would not be required for audits of brokers and dealers reporting under the Securities Exchange Act of 1934 Rule 17a-5, investment companies other than business development companies, and employee stock purchase, savings, and similar plans.

The reproposal does not include the provision for a new auditing standard regarding the auditor’s responsibilities for other information outside the financial statements.

The history of the proposal can be found in Rulemaking Docket 034.

Related article:

PCAOB Proposes New Standards to Enhance Auditor Reporting

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