On March 29, the Public Company Accounting Oversight Board (PCAOB) published for comment proposed auditing standards related to communications with audit committees. The proposed auditing standards would supersede PCAOB interim standard AU sec. 380, Communication With Audit Committees, and AU sec. 310, Appointment of the Independent Auditor, and amend a number of other interim standards. Any new standards adopted by the PCAOB will be submitted to the Securities and Exchange Commission for approval. The PCAOB anticipates that the standards will be effective, if approved by the SEC, for audits or fiscal years beginning after December 15, 2010.
Purpose of Proposed Auditing Standards
The purpose of the proposed auditing standards is to improve communications between auditors and the audit committees of public company boards of directors. The new standards are intended to enhance the relevance and effectiveness of communications between the auditor and the audit committee and emphasize the importance of effective, two-way communications between the auditor and the audit committee to better achieve the objectives of the audit. The summary below highlights some of the more significant changes set forth in the proposed standards.
- Establish a Mutual Understanding of the Terms of the Audit. The new standards include a requirement that the auditor and the audit committee establish a mutual understanding of the terms of the audit engagement. The current standards do not provide that such a relationship must specifically be with the audit committee rather than with the client. The proposed standards require the engagement to be recorded in a written engagement letter which includes the understanding of the objectives of the audit and the responsibilities of the auditor and management.
- Obtaining Information Related to the Audit. The proposed standards require the auditor to make inquiries of the audit committee, or its chair, about risks of material misstatement, including inquiries related to fraud risks. In addition, the proposed standards require the auditor to inquire whether the audit committee is aware of any other matters that may be relevant to the audit, including complaints or concerns raised regarding accounting or auditing matters. The Securities Exchange Act requires audit committees to establish procedures for the receipt, retention and treatment of complaints or concerns raised regarding accounting or auditing matters; requiring that the auditor obtain this information is designed to “encourage more dialogue between the auditor and the audit committee regarding the risks of material misstatement and other matters relevant to the audit.”
- Overview of the Audit Strategy and Timing of the Audit. The proposed standards include a new requirement for the auditor to communicate to the audit committee an overview of the audit strategy, including a discussion of significant risks identified by the auditor.
- Accounting Policies and Estimates. The proposed standards require the auditor to discuss with the audit committee the auditor’s judgments about the quality and acceptability of the company’s accounting policies, as well as its evaluation regarding the reasonableness of the process used by management to develop critical accounting estimates.
- Corrected and Uncorrected Misstatements. The proposed standards require the auditor to provide a schedule of uncorrected misstatements relating to accounts and disclosures that were presented to management, including, among other things, the auditor’s basis for determining that the uncorrected misstatements were immaterial.
- Timing. The proposed standards require that all matters required by the proposed standard be communicated prior to the issuance of the auditor’s report.
- Other Communication Requirements. The proposed standards include a new requirement that the auditor communicate to the audit committee when the auditor expects to modify the opinion in the auditor’s report or include an explanatory paragraph, and the reasons therefor.
The PCAOB will be accepting comments until 5:00 PM EDT on May 28.
Click here for the full text of the proposed standards.