Auditor’s Reporting Model
On June 1, 2017, the PCAOB adopted a new auditing standard, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,” that will require auditors to provide additional information in their reports. The standard is subject to SEC approval before it can become effective, and if approved, it will apply to audits conducted under PCAOB standards.
The new standard significantly modifies the auditor’s report while retaining the pass-fail reporting model. The most significant change to the auditor’s report is the requirement to communicate in the report any critical audit matters (CAMs) arising during the current period audit. A CAM is defined as a matter that has these elements:
- Has been or was required to be communicated to the audit committee
- Relates to accounts or disclosures that are material to the financial statements
- Involves especially challenging, subjective, or complex auditor judgment
The auditor’s report will include:
- Disclosure of the auditor’s tenure
- A statement on independence
- Addition of the phrase “whether due to error or fraud” regarding whether the financial statements are free of material misstatements
- Standardized form on the auditor’s report
- Requirement that the report be addressed to at least the company’s shareholders and board of directors or equivalents
The effective date is for audits of fiscal years ending on or after Dec. 15, 2017, for all provisions other than the disclosures of the CAMs. The CAMs disclosures are effective for large accelerated filers, in audits of fiscal years ending on or after June 30, 2019, and for all other companies, in audits of fiscal years ending on or after Dec. 15, 2020.
Naming the Engagement Partner and Other Audit Firms
The second part of the PCAOB’s rules for filing Form AP, “Auditor Reporting of Certain Audit Participants,” went into effect at the end of June. The disclosure requirement for naming the engagement partner was effective for auditor’s reports issued on or after Jan. 31, 2017, and the requirement to disclose other audit firms participating in the audit was effective for reports issued on or after June 30, 2017.
The PCAOB adopted, on Dec. 15, 2015, and the SEC later approved, on May 9, 2016, rules to provide investors with more information about participants in public company audits. In accordance with the rules, auditors are required to file a PCAOB Form AP for each issuer audit. Information to be disclosed includes:
- Engagement partner name
- Names, locations, and extent of participation of other accounting firms that took part in the audit and whose work constituted 5 percent or more of the total audit hours
- Number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours
The standard deadline for filing Form AP is 35 days after the date the auditor’s report is first included in an SEC-filed document. However, for initial public offerings, the Form AP filing deadline is 10 days after the auditor’s report is first included in an SEC-filed document.
The PCAOB provides more guidance on its website for “Form AP: Auditor Reporting of Certain Audit Participants,” including staff guidance updated on Feb. 16, 2017.
On June 20, 2017, the CAQ issued “Form AP – Auditor Reporting of Certain Audit Participants: A Tool for Audit Committees,” which can help audit committees participate in the dialogue about the role of audit participants and the new disclosures. Previously, on Dec. 19, 2016, the CAQ issued Alert 2016-03, “Form AP, Auditor Reporting of Certain Audit Participants,” to serve as a resource and reminder of considerations related to the new Form AP reporting. The alert includes a number of frequently asked questions on the reporting and disclosure requirements of the new form.