On Aug. 13, 2013, the PCAOB proposed two new auditing standards for public comment.

1)  The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion

This standard would supersede portions of AU sec. 508, Reports on Audited Financial Statements. The proposed standard retains the pass/fail model, but aims to provide more information to investors regarding the audit and auditor by requiring the auditor to report “critical audit matters” specific to the audit.

What are “critical audit matters”? They are described by the PCAOB as those that:

  • involved the most difficult, subjective or complex auditor judgments;
  • posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or
  • posed the most difficulty to the auditor in forming an opinion on the financial statements.

Such matters would be determined by the auditors and are ordinarily matters that are 1) documented in the engagement completion document; 2) reviewed by the engagement quality reviewer; 3) communicated to the audit committee; or 4) any combination of the three. The PCAOB has provided a list of factors the auditor should take into account in determining the critical audit matters.

The report of the critical audit matters would identify the critical audit matter, describe the considerations in determining that the matter is critical and refer to the relevant financial statement accounts and disclosures. If the auditor determines that there are no such matters, the auditor would state so in the auditor’s report.

The proposed auditor reporting standard also contains the following new elements:

  • A statement of auditor independence, explaining that the auditor is a public accounting firm registered with the PCAOB and is required to be independent of the company.
  • A statement of auditor tenure, which would disclose the year the auditor began serving as the company’s auditor.
  • Enhanced standardized language in the auditor’s report, including the addition of the phrase “whether due to error or fraud,” when describing the auditor’s responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether due to error or fraud.

2)  The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report

The second proposed standard would supersede AU sec. 550, Other Information in Documents Containing Audited Financial Statements. Currently under AU sec. 550, the auditor has a responsibility to “read and consider” other information in certain documents that also contain the audited financial statements and the related auditor’s report, and to consider whether the other information is materially inconsistent with information in the financial statements. The existing standard has no requirements beyond “read and consider” with respect to the other information; there is no reporting requirement.

The proposed standard applies the auditor’s responsibility for other information specifically to the company’s annual reports filed with the SEC and adds a reporting requirement. The auditor would be required to evaluate information in the report filed with the SEC that is outside the audited statements, e.g., selected financial data, management’s discussion and analysis, and exhibits. The auditor would also have to communicate that responsibility with respect to the other information in the audit, and report the result of the evaluation.

In addition to the proposed new standards, the Board is also proposing amendments to several of the existing auditing standards so that they conform to the proposed other information standard.

You can find a Fact Sheet on the proposed standards here. Interested parties can comment on the proposal through Dec. 11, 2013, through the PCAOB’s website or by mail at:

Public Company Accounting Oversight Board

Attention: Office of the Secretary

1666 K Street, NW

Washington, DC 20006-2803

These standards are subject to a comment period and may change. New standards would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after Dec. 15, 2015.