On August 15, 2012 the PCAOB adopted Auditing Standard No. 16 (AS 16), Communications with Audit Committees, replacing and expanding the PCAOB‘s interim auditing standards AU sec. 380, Communication with Audit Committees, and AU sec. 310, Appointment of the Independent Auditor. AS 16 specifies the communications an auditor must make to audit committees and encourages ―effective two-way communication between the auditor and the audit committee.‖ The new standard requires, among other things:

  • Engagement. Auditors must establish an understanding of the terms of the audit engagement with the audit committee. The terms of the engagement must be recorded in an engagement letter executed on behalf of the company with the audit committee‘s acknowledgement and agreement.
  • Communications. AS 16 retains many of the communications requirements in AU sec. 380 and also incorporates new communications requirements to provide the audit committee with additional information. Pursuant to AS 16, auditors are required to communicate:
    • certain matters regarding the company‘s accounting policies, practices and estimates;
    • the auditor‘s evaluation of the quality of the company‘s financial reporting;
    • information related to significant unusual transactions;
    • the auditor‘s views regarding significant accounting or auditing matters when the auditor is aware that management consulted with other accountants about such matters and the auditor has identified a concern regarding these matters;
    • an overview of the overall audit strategy, including timing of the audit, significant risks identified by the auditor and significant changes to the planned audit strategy or identified risks;
    • information about the nature and extent of specialized skill or knowledge needed in the audit;
    • the basis for the auditor‘s determination that he or she can serve as principal auditor if significant parts of the audit will be performed by other auditors;
    • concerns regarding management‘s anticipated application of accounting pronouncements that have been issued but are not yet effective;
    • difficult or contentious matters for which the auditor consulted outside of the engagement team;
    • the auditor‘s evaluation of going concern;
    • departure from the auditor‘s standard report; and other significant matters, including complaints or concerns regarding accounting or auditing matters that come to the auditor‘s attention during the audit.
  • Timing. Auditors must make the required communications to the audit committee before the auditor issues its audit report.
  • Inquiries. Auditors must make additional inquiries of the audit committee to address whether the audit committee is aware of matters relevant to the audit, including violations or possible violations of laws or regulations.  

If approved by the SEC, AS 16 will be effective for audits of fiscal years beginning on or after December 15, 2012.