It’s time for auditors to scrutinize new standards issued in May by the Auditing Standards Board (ASB) that will significantly impact auditor reports issued under Generally Accepted Auditing Standards (GAAS) for nonpublic companies. A closer look now will help auditors prepare for client discussions, as 2020 reports are quickly approaching.
Although much of the information included in the report is the same, there are significant changes to the format and some new required information.
Statement on Auditing Standards No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, contains guidance about auditor responsibilities in forming an opinion and the form and content of the audit report.
The intent is to provide greater value to users of audit reports by making the auditor’s opinion and basis for opinion more visible and transparent. In addition, changes to language in the report are intended to provide more useful information and to more clearly define the responsibilities of both the auditor and management. One of the ASB’s objectives was to converge GAAS with audit reporting standards of the International Auditing and Assurance Standards Board (IAASB) and improve consistency with the auditor reporting model of the Public Company Accounting Oversight Board (PCAOB).
The ASB issued an additional standard in May. Statement on Auditing Standards No. 135, Omnibus Statement on Auditing Standards - 2019, deals with audit performance and reporting. It aligns ASB guidance for auditor communications, related parties, and consideration of fraud more closely with PCAOB guidance in these areas. The intent of the ASB was to eliminate unnecessary differences between ASB guidance and PCAOB standards, to increase consistency, and improve the audit quality of auditors who perform audits under both standards.
SAS 134 and SAS 135 are effective for audits for periods ending on or after Dec. 15, 2020. Early implementation is not permitted.
What has changed?
SAS 134 changes the positioning of the information within the report and some of the language of the audit opinion. The intent of the ASB was to address concerns of users of audits that wanted a better understanding and clearer communication about the conduct of the audit and conclusions reached.
As such, the audit opinion will now appear at the beginning of the report and will have the heading, “Opinion.”
It will be immediately followed by the “Basis for Opinion” section, which is intended to provide additional context about the opinion and must include a statement about auditor independence and compliance with other ethical requirements. The Basis for Opinion section is now required for all audit reports, not only those with modified opinions as in prior guidance.
Next is a section that includes expanded discussion of the responsibilities of management for the financial statements. It includes additional disclosure about management’s evaluation of going concern matters, even if there is not any doubt about the entity’s ability to continue as a going concern.
Following management’s responsibilities is an expanded discussion of the auditor’s responsibilities for the audit. This section includes the auditor’s procedures relating to use of judgment and professional skepticism in areas like risk assessment, internal controls, accounting estimates, evaluating going concern, and communication with those charged with governance.
How SAS 134 is organized
SAS 134 amends a number of other auditing standards and includes new requirements relating to understanding the entity, assessing risk, and performing procedures in response. It also includes illustrations of audit reports under typical audit situations that auditors can use for reference. It contains the following sections, which supersede existing Sections 700, 705, and 706 and add the new Section 701:
Section 700, Forming an Opinion and Reporting on Financial Statements, is the core section that covers the auditor’s responsibility when opining on financial statements. It provides the form and content of an unmodified opinion, when the auditor’s conclusion is that the financial statements are presented fairly in all material respects and in accordance with the applicable financial reporting framework. This section has an appendix of amendments to the various auditing standard sections that deal with auditor reporting and related disclosures.
Section 705, Modifications to the Opinion in the Independent Auditor’s Report, provides the form and content of a qualified, adverse, and disclaimer of opinion. This section does not change existing audit guidance about when an auditor should modify the opinion, because the auditor has concluded that the financial statements are materially misstated or the auditor is unable to form a conclusion or the type of report modifications to be made.
Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report, covers the form and content of these types of additional communications in an audit report. The revised standard requires that an auditor include the conclusion about doubt related to an entity’s continuing as a going concern under a separate section headed, “Substantial Doubt About The Entity’s Ability to Continue as a Going Concern,” rather than in an emphasis of matter paragraph under the prior guidance.
Section 701, Communicating Key Audit Matters in the Independent Auditor’s Report, provides guidance about what an auditor should communicate and how it should be presented and only applies when the auditor is engaged to communicate key audit matters (KAMs). KAMs are matters that, in the auditor’s judgment, are most significant in the audit and are selected from matters the auditor communicates to those charged with governance. KAMs were added by the IAASB, and they are not the same as critical audit matters (CAMs) that are required to be communicated under PCAOB standards. SAS 134 does not require communication of KAMs, but this section provides guidance if the auditor is reporting on KAMs.
What should auditors do now?
Although 2019 year-end audit reports will not change, 2020 reports are not far off. Auditors should be thinking about these changes now and helping their clients prepare for discussions with users of their financial statements and audit reports.
It should be noted that audits of employee benefit plans subject to the Employee Retirement Income Security Act (ERISA) are scoped out of these standards and are the subject of a separate statement, SAS No.136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, issued July 2019. SAS 136 is effective for audits for periods ending on or after Dec. 15, 2020, and early implementation is not permitted.