Proposed Standards for Expanded Language in Auditor Reports
On 13 August 2013, the Public Company Accounting Oversight Board ("PCAOB") proposed two new auditing standards for expanded language in the auditor's report:
To require auditors to include a discussion of "critical audit matters" specific to the audit; and
To require auditors to provide their evaluation of "other information" that is in a company's annual report filed with the SEC.
The PCAOB is seeking comment on the proposed standards until 11 December 2013. If adopted, the standards will be applicable to audits of reporting companies, broker-dealers, investment companies, and employee stock purchase, savings and similar plans, and would be effective for audits of financial statements for fiscal years beginning on or after 15 December 2015.
Critical Audit Matters
The first proposed standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, would retain the pass/fail model of audit reports, but would revise the auditor's report to require additional content by asking the auditor to report on "critical audit matters".
These are areas which involved the most difficult, subjective, or complex auditor judgments, or which posed the most difficulty to the auditor in obtaining sufficient appropriate evidence or in forming the opinion on the financial statements. In addition to identifying the critical audit matters, the audit report would be required to describe the considerations that caused the auditor to determine that the matter was a critical audit matter and to refer to the financial statement accounts and disclosures to which the critical audit matter relates.
The PCAOB has suggested that such matters would ordinarily be matters of such importance that they are included in engagement completion documents, reviewed by the engagement quality reviewer, and communicated to the audit committee.
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 second proposed standard, The Auditor's Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and Related Auditor's Report, would apply the auditor's responsibility for other information specifically to a company's annual report filed with the SEC under the Exchange Act that contains the company's audited financial statements and the related auditor's report.
This would require the auditor to evaluate other information for a material misstatement of fact or a material inconsistency, or the manner of their presentation, in the audited financial statements, based on relevant audit evidence obtained and conclusions reached during the audit. "Other information" would include items such as risk factors, selected financial data, management's discussion & analysis, exhibits and certain information incorporated by reference. The audit report would be required to include a statement of the auditor's responsibility for the evaluation and the results of the evaluation.
The proposed auditing standards are available at: http://pcaobus.org/Rules/Rulemaking/Docket034/Release_2013-005_ARM.pdf
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