Significant Changes are Proposed for Audit Reports: A Summary of PCAOB Release No. 2013-05
On August 13, 2013, the Public Company Accounting Oversight Board (PCAOB) issued PCAOB Release No. 2013-05, proposing two new auditing standards, The Auditor’s Report on the Audit of Financial Statement When the Auditor Expresses an Unqualified Opinion (the “proposed auditor reporting standard”) and The Auditor’s Responsibilities Regarding the Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report (the “proposed other information standard”). These proposed new auditing standards and amendments are the result of an extensive three-year outreach initiative by the PCAOB. The proposed new auditing standards and amendments attempt to address investor’s and other financial statement user’s dissatisfaction with the existing auditor’s report and its lack of any information specific to the audit of the company. Below is a brief summary of these proposed auditing standards:
The proposed auditor reporting standard would retain the current pass/fail model and the basic elements of the current auditor’s report, but would require the auditor to communicate a wider range of information specific to the particular audit. It would expand the language in the existing auditor’s report by requiring the following significant changes:
- The communication of critical audit matters as determined by the auditor;
- New inclusions in the report related to:
- auditor independence,
- auditor tenure, and
- the auditor’s responsibilities for, and the results of, the auditor’s evaluation of other information outside the financial statements; and
- Enhancements to existing language related to the auditor’s responsibilities for fraud and notes to the financial statements.
The proposed other information standard enhances the auditor’s responsibility with respect to “other information.” Other information is described as information (other than the audited financial statements and the related auditor’s report) included in a company’s annual report that is filed with the SEC under the Exchange Act (e.g. Selected Financial Data, Management’s Discussion Analysis, exhibits, and certain information incorporated by reference).
Under the existing PCAOB standards, the auditor has responsibility to “read and consider” other information in certain documents that also contain the audited financial statements and the related auditor report. The existing standards require the auditor to consider whether the other information is materially inconsistent with the information in the financial statements.
The proposed other information standard as stated in the release would:
- Apply the auditor’s responsibility for other information specifically to a company’s annual reports filed with the SEC under the Exchange Act that contain that company’s audited financial statements and related auditor’s report;
- Enhance the auditor’s responsibility for other information by adding procedures for the auditor to perform in evaluating the other information based on relevant audit evidence obtained and conclusions reached during the audit;
- Require the auditor to evaluate the other information for a material misstatement of fact as well as the material inconsistency with amount or information, or the manner of their presentation, in the audited financials; and
- Require communication in the auditor’s report regarding the auditor’s responsibilities for, and the results of, the auditor’s evaluation of the other information.
Proposed Effective Date, Next Steps and Request for Public Comment
The release indicates that the proposed standards and amendments would be effective for audits of financial statements for fiscal years beginning on or after December 15, 2015; however, this date depends on the timing of approval by the PCAOB and SEC of any final standard and related amendments. Written comments to the PCAOB should be received no later than December 11, 2013. In the release the PCAOB notes that it is considering holding a public roundtable in 2014 to discuss these proposed standards and the comments received.
To read the full PCAOB Release No. 2013-005, please click here.
If you would like to discuss these proposed standards further, please call Carl Chatto or your BNN advisor at 1.800.244.7444.
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