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AICPA Seeks to Align Audit Guidance with International Standards

by Katerina Starkova
November 13, 2017

AICPA Seeks to Align Audit Guidance with International Standards    

The AICPA’s Auditing Standards Board (ASB) is planning to issue a two-part proposal to expand the auditor’s report and focus more attention on financial statement disclosures. The proposal is part of the ASB’s effort to align its standards with the guidance of the International Auditing and Assurance Standards Board (IAASB). The ASB also considered a recently approved Securities and Exchange Commission (SEC) rule to expand the auditor’s report. Here are the details.

A Two-Part Proposal

In July, the ASB voted to propose improvements to the contents of the auditor’s report. The proposal would align the ASB’s guidance with several new and revised standards the IAASB issued in January 2015, including International Standard on Auditing (ISA) 701, Communicating Key Audit Matters in the Independent Auditor’s Report. That standard requires auditors to include in the auditor’s report key audit matters (KAMs), which are the issues the auditor viewed as most significant during the examination of the financial statements and reporting systems.

Then the ASB unanimously voted in September to propose changes to the guidance for auditors when they examine a financial statement’s disclosures. The proposal would make auditors focus more attention on financial statement disclosures and address the risk of financial misstatements more explicitly. The purpose of the proposed amendments is to draw attention to disclosures earlier in the audit process.

Some of the provisions for the disclosure project affect the proposed changes to the audit report standards. So, the ASB decided to issue one exposure draft that combines the proposed amendments from the two projects.

SEC Rule

The ASB has also examined the SEC’s recently approved rule to expand the auditor’s report. (See “SEC Moves Ahead With Controversial Audit Report Changes” below.) The changes include a requirement that auditors describe the critical audit matters (CAMs) in the auditor’s report, similar to the IAASB’s requirement to disclose KAMs.

The ASB wanted to avoid unnecessary differences between the requirements of the ASB and SEC. Although certain changes were made to the ASB’s proposal in view of the SEC reporting model, the ASB’s primary focus was on convergence with the ISAs. So, there may eventually be subtle differences between the audit reports of public and private entities.

Stay Tuned

If the ASB’s proposed amendments are finalized, they will be effective no earlier than for audited financial statements for periods ending on or after June 15, 2019. (The final effective date depends on if and when the changes are adopted.)

SEC Moves Ahead with Controversial Audit Report Changes

Over the next few years, businesses will be busy implementing the new revenue recognition, lease and credit loss standards. Many accounting departments lack the bandwidth to tackle additional changes to the accounting rules. As a result, the future of two proposed updates is now uncertain.

The auditor’s report is currently based on a brief pass-fail model. In June, the PCAOB published Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards. On October 23, the SEC approved the proposal—which is the first significant change to the content of the auditor’s report since the 1940s.

The new rule requires auditors to add a description of the critical audit matters (CAMs) that arose while scrutinizing their clients’ financial statements. The PCAOB defines critical matters as issues that:

  • Have been communicated to the audit committee,
  • Are related to accounts or disclosures that are material to the financial statements, and
  • Involved especially challenging, subjective or complex judgments from the auditor.

In addition, the new rule requires accounting firms to include tenure, or how long they have audited their clients. Audit reports must also include the phrase “whether due to error or fraud” in describing the auditor’s responsibility to ensure that the financial statements are accurate. It has to include a statement that the auditor is required to be independent.

The final rule standardizes the format of the auditor’s report with the opinion appearing in the first section. Section titles have been added to guide the reader, and the report will be addressed to the company’s shareholders and board of directors.

The standardized format goes into effect for audits of fiscal years ending on or after December 15, 2017. Auditors will have to start communicating CAMs of public audit clients with more than $700 million in market value for fiscal years ending on or after June 30, 2019.

For public companies below that threshold, the effective date for communicating CAMs is December 15, 2020. In addition, the CAM-reporting requirements won’t apply to audits of emerging growth companies, which have less than $1 billion in revenue, for five years after becoming public.

November 13, 2017

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