PCAOB Proposes Changes to Auditor Reporting Model | Practical Law

PCAOB Proposes Changes to Auditor Reporting Model | Practical Law

The Public Company Accounting Oversight Board (PCAOB) has proposed two new auditing standards and related amendments that would change the format of the standard auditor's report and give auditors additional responsibilities for information outside the financial statements.

PCAOB Proposes Changes to Auditor Reporting Model

Practical Law Legal Update 2-537-5785 (Approx. 4 pages)

PCAOB Proposes Changes to Auditor Reporting Model

by Practical Law Corporate & Securities
Published on 13 Aug 2013 • USA (National/Federal)
The Public Company Accounting Oversight Board (PCAOB) has proposed two new auditing standards and related amendments that would change the format of the standard auditor's report and give auditors additional responsibilities for information outside the financial statements.
On August 13, 2013, the Public Company Accounting Oversight Board (PCAOB) proposed two new auditing standards and related amendments that would change the standard auditor's report and give auditors responsibilities for information in company annual reports outside of the financial statements. The proposals retain the "pass/fail" model currently used in auditor's reports, but require auditors to provide additional information about the audit and the auditor. The proposals follow a June 2011 concept release on possible changes to the current framework for auditors' reports.
Currently, an auditor's report identifies the financial statements that were audited, describes the nature of an audit and expresses the auditor's opinion on the financial statements using standardized language. This format is described as a pass/fail model because the auditor opines on whether the financial statements are fairly presented (pass) or not (fail). However, as a result of performing the audit, the auditor often has additional information about the financial statements that is not included in the report, but which could be useful to investors and other users of the financial statements.
In order to make the auditor's report more informative and increase its relevance and usefulness, the proposed new format would:
  • Retain the pass/fail model, including the basic elements of the current auditor's report. Certain standardized language would be enhanced.
  • Require the auditor to communicate "critical audit matters" that would be specific to each audit. This would include a discussion of matters the auditor dealt with during the audit that:
    • involved the most difficult, subjective, or complex judgments by the auditor;
    • were the most difficult for the auditor to obtaining sufficient appropriate evidence for; and
    • caused the most difficultly for the auditor in forming an opinion on the financial statements.
  • Add new elements to the auditor's report related to auditor independence, auditor tenure and the auditor's responsibility for, and the results of, the auditor's evaluation of other information in a company's annual report outside the financial statements.
The proposals would also give auditors responsibilities for information in company annual reports outside of the financial statements. This information, referred to as "other information," would include:
  • The selected financial data.
  • The MD&A.
  • Exhibits and certain information incorporated by reference.
Under existing standards, the auditor must read and consider this information. Under the proposal, the auditor would need to perform specific procedures on the information, make evaluations and then report on them in its audit report.
The PCAOB is accepting public comments until December 11, 2013. It also plans to hold a roundtable discussion on the proposals and comments received in 2014.
For more information on the proposal, see the PCAOB's press release and fact sheet. For general information on auditing, see Practice Note, Auditing: An Overview.