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New PCAOB Standard Expands Auditor’s Report

Jun 1st 2017
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In what is considered to be the first significant changes to the existing auditor’s report in 70 years, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditor reporting standard on June 1 that will provide investors and other financial statement users with more relevant information about the audit.

“The changes adopted today breathe life into a formulaic reporting model and give investors the information they’ve been asking for from auditors,” said PCAOB Chairman James Doty. “The United States also now joins many other countries in adopting an expanded audit report.”

The final standard, The Auditor’​s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and its related amendments will require auditors to include in their reports a discussion of critical audit matters (CAMs) arising from the audit that:

  • Have been communicated to the audit committee.
  • Are related to accounts or disclosures that are material to the financial statements.
  • Involve especially challenging, subjective, or complex auditor judgment.

When determining whether a matter involved especially challenging, subjective, or complex auditor judgment, the auditor will take into consideration certain factors, including the auditor’s assessment of the risks of material misstatement.

The communication of each CAM in the auditor’s report includes:

  • Identification of the CAM.
  • Description of the principal considerations that led the auditor to determine that the matter was a CAM.
  • Description of how the CAM was addressed in the audit.
  • Reference to the relevant financial statement accounts or disclosures.

Also under the new standard, the auditor’s tenure (specifically, the year that the auditor began serving consecutively as the company auditor) will be included in the auditor’s report, as will the phrase “whether due to error or fraud” in describing the auditor’s responsibility under PCAOB standards to plan and perform the audit for reasonable assurance that financial statements are free of material misstatements.

According to the PCAOB, a phased approach to effective dates gives investors and other financial statement users new information considered reasonably practicable while still allowing companies and audit committees time to prepare for CAM reporting implementation.

The effective dates include:

  • New auditor’s report format, tenure, and other information: audits for fiscal years ending on or after Dec. 15, 2017.
  • Communication of CAMs for audits of large accelerated filers: audits for fiscal years ending on or after June 30, 2019.
  • Communication of CAMs for audits of all other companies: audits for fiscal years ending on or after Dec. 15, 2020.

The final standard applies to audits conducted under PCAOB standards. Communication of CAMs is not required for audits of:

  • Emerging growth companies.
  • Brokers and dealers.
  • Investment companies other than business development companies.
  • Employee stock purchase, savings, and similar plans.

Still, PCAOB member Steven Harris took issue with several aspects of the new standard. While it retains the pass/fail model in the existing auditor’s report, Harris said it creates too much discretion for auditors and not enough cross-comparison of CAM-related findings.

“The board must carefully monitor implementation so it doesn’t result in boilerplate language and does in fact provide careful information for investors,” he said.

In May 2016, the PCAOB reproposed the auditor reporting standard after revising an initial proposal released in August 2013.

While the concept of CAMs was carried forward from the 2013 proposal, the PCAOB said the reproposed standard narrowed the requirements in the following ways:

  • Limits the source of potential CAMs to matters communicated or required to be communicated to the audit committee.
  • Adds a materiality component to the definition of a CAM.
  • Narrows the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment.
  • Revises the related documentation requirement.

The new rules are subject to approval by the US Securities and Exchange Commission.

Related articles:

PCAOB Revamps Proposal to Enhance Auditor’s Report
PCAOB Proposes New Standards to Enhance Auditor Reporting


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