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State Board Report

September 2013

While retaining the pass/fail model of the auditor’s report, the Public Company Accounting Oversight Board is proposing standards that would require the auditor to communicate a wider range of information specific to the particular audit. At their August 13, 2013 meeting, the PCAOB members unanimously voted to approve the release of two proposed standards: one would require that the auditor’s report contain a discussion of “critical audit matters” (CAMs) specific to the audit; the second would require that the auditor’s report contain the auditor’s evaluation of “other information,” which is in the company’s annual report filed with the SEC. The PCAOB defines CAMs as those matters addressed by the auditor during the audit of the financial statements that involved the most difficult, subjective or complex auditor judgments, were the toughest for the auditor to obtain sufficient appropriate evidence, and the most difficult for the auditor to form an opinion on in the financial statements.

The auditor’s report has not changed since the 1940′s and PCAOB Chairman James R. Doty observed at the PCAOB’s meeting: “Now having opened the audit report to address the needs of users, it will likely not be another 70 years before it is opened again. Changes may be incremental, as we evaluate the usefulness of improvements and, if successful, engender further change as demand for more kinds of auditor assurance grows.”

The following significant changes to the existing auditor’s report are being proposed:

  1. Require the auditor to communicate in the auditor’s report the CAMs and, if there are none, state that there are no such matters to communicate.
  2. Add to the auditor’s report elements related to auditor independence, auditor tenure and the auditor’s responsibility for, and evaluation of, other information in annual reports containing the audited financial statements and the related auditor’s report.
  3. Add standardized language in the auditor’s report including the phrase “whether due to error or fraud,” when describing the auditor’s responsibility to obtain assurance as to whether the statements are free of material misstatements.

 

PCAOB member Jeanette M. Franzel stated: “The fundamental question about auditor tenure is whether the single data point of auditor tenure belongs in the auditor’s report? I am concerned that by including auditor tenure in the auditor’s report, there may be an implication that there is an analytical basis for interpreting such information.” Ms. Franzel will be speaking at NASBA’s Annual Meeting in October.

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