AUDITING STANDARD No. 16 – RELATED AMENDMENTS TO PCAOB TO ...
1666 K Street, NW
Washington, DC 20006
Telephone: (202) 207-9100
Facsimile: (202) 862-8430
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COMMUNICATIONS WITH AUDIT )
COMMITTEES;
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RELATED AMENDMENTS TO PCAOB )
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STANDARDS;
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AND TRANSITIONAL AMENDMENTS )
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TO AU SEC. 380
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AUDITING STANDARD No. 16 ¨C
Summary:
Board
Contacts:
PCAOB Release No. 2012-004
August 15, 2012
PCAOB Rulemaking
Docket Matter No. 030
The Public Company Accounting Oversight Board ("PCAOB" or
the "Board") is adopting (i) Auditing Standard No. 16,
Communications with Audit Committees, that would supersede
the Board's interim standards AU sec. 380, Communication With
Audit Committees, and AU sec. 310, Appointment of the
Independent Auditor, (ii) transitional amendments to AU sec. 380,
and (iii) related amendments to PCAOB standards.
Jennifer
Rand,
Deputy
Chief
Auditor
(202/207-9206,
randj@), Jessica Watts, Associate Chief Auditor
(202/207-9376, wattsj@), and Hasnat Ahmad,
Assistant Chief Auditor (202/207-9349, ahmadh@).
*****
I.
Introduction
With the passage of the Sarbanes-Oxley Act of 2002 (the "Act") and the
establishment of the PCAOB, Congress acknowledged that auditors play an
important role in protecting the interests of investors by preparing and issuing
informative, accurate, and independent audit reports.1/ The audit committee2/
1/
See Section 101(a) of the Act, 15 U.S.C. ¡ì 7211(a); Senate
Report No. 107-206, at 5-6 (July 3, 2002).
2/
The term "audit committee," as defined in Auditing Standard No.
16, is a committee (or equivalent body) established by and among the board of
PCAOB Release No. 2012-004
August 15, 2012
Page 2
also plays an important role in protecting the interests of investors by assisting
the board of directors in fulfilling its responsibility to a company's shareholders
and others to oversee the integrity of a company's accounting and financial
reporting processes and audits. The audit committee, among other things,
serves as the board of director¡¯s principal interface with the company¡¯s auditors
and facilitates communications between the company¡¯s board of directors, its
management, and its independent auditors on significant accounting issues
and policies. The roles of auditors and audit committees are critical to the
efficiency and integrity of the capital markets.
Both the auditor and the audit committee benefit from a meaningful
exchange of information regarding significant risks of material misstatement in
the financial statements and other matters that may affect the integrity of the
company's financial reports. Communications between the auditor and the audit
committee allow the audit committee to be well-informed about accounting and
disclosure matters, including the auditor's evaluation of matters that are
significant to the financial statements, and to be better able to carry out its
oversight role. Communications with the audit committee provide auditors with
a forum separate from management to discuss matters about the audit and the
company's financial reporting process.
The Board is adopting Auditing Standard No. 16, Communications with
Audit Committees (the "standard"), and related amendments to improve the
audit by enhancing communications between auditors and audit committees.
Auditing Standard No. 16 will replace interim standards AU sec. 380,
Communication With Audit Committees ("AU sec. 380"), and AU sec. 310,
Appointment of the Independent Auditor ("AU sec. 310"). Adoption of the
standard is in the public interest because the standard establishes
requirements that enhance the relevance, timeliness, and quality of the
communications between the auditor and the audit committee. The enhanced
relevance, timeliness, and quality of communications should facilitate audit
directors of a company for the purpose of overseeing the accounting and
financial reporting processes of the company and audits of the financial
statements of the company; if no such committee exists with respect to a
company, the entire board of directors of the company. For audits of
nonissuers, if no such committee or board of directors (or equivalent body)
exists with respect to the company, the person(s) who oversee the accounting
and financial reporting processes of the company and audits of the financial
statements of the company.
PCAOB Release No. 2012-004
August 15, 2012
Page 3
committees' financial reporting oversight, fostering improved financial reporting,
thereby benefitting investors.
Auditing Standard No. 16 is aligned with the requirements of the Act.
For many public companies, the Act served to strengthen and expand the role
of the audit committee in the financial reporting process. For example, the Act
requires that audit committee members of listed companies be independent
and that audit committees be responsible for the appointment, compensation,
and oversight of the work of the external auditor for the purpose of preparing or
issuing an audit report or related work.3/ These requirements place the audit
committee at the center of the relationship between management of a public
company and its auditor.
Auditing Standard No. 16 is intended to improve the audit4/ by fostering
constructive dialogue between the auditor and the audit committee about
significant audit and financial statement matters. The standard requires the
auditor to communicate certain matters regarding the audit and the financial
statements to the audit committee, which should assist the audit committee in
fulfilling its oversight responsibilities regarding the financial reporting process.
Effective two-way communication between the auditor and the audit committee
on such relevant matters also will benefit the auditor in performing an effective
audit.
Auditing Standard No. 16 encourages effective two-way communication
between the auditor and the audit committee throughout the audit to assist both
parties in understanding matters relevant to the audit. Communications that are
tailored to the circumstances and informative, rather than "boiler-plate" or
standardized, will enable the auditor and the audit committee to engage in a
dialogue that is more likely to benefit both the audit committee, in conducting its
oversight responsibilities, and the auditor, in conducting an effective audit.
Effective communication between the auditor and the audit committee may
3/
See Section 301 of the Act and Section 10A(m)(2) of the
Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. ¡ì 78j-1(m)(2).
4/
For purposes of this release and standard, an audit is either an
audit of internal control over financial reporting that is integrated with an audit of
financial statements or an audit of financial statements only.
PCAOB Release No. 2012-004
August 15, 2012
Page 4
involve many forms of communication, such as presentations, charts, written
reports, or robust discussions.
AU sec. 380, which became effective in January 1989, indicated that
audit committee communications are incidental to the audit and are not
required to occur prior to the issuance of the auditor's report. In contrast,
Auditing Standard No. 16 recognizes the importance of the auditor's
communications with the audit committee in today's business and regulatory
environment; therefore, Auditing Standard No. 16 requires the auditor to
communicate the audit strategy and results of the audit to the audit committee
in a timely manner and prior to the issuance of the auditor's report to provide an
opportunity for the audit committee and the auditor to take appropriate action to
address the matters communicated.
Timely communications with the audit committee help the auditor
improve the audit by, among other things (i) informing the audit committee,
which has responsibility for the oversight of financial reporting, about significant
matters related to the audit and the financial statements, (ii) enabling the
auditor to obtain the audit committee's insights and information about
transactions and events, (iii) enabling the auditor to learn about complaints
regarding accounting or auditing matters, and (iv) assisting the auditor in
gaining a better understanding of the company and its control environment.
Auditing Standard No. 16 generally links the new communication
requirements to the results of related audit performance requirements in other
PCAOB standards, or the conduct of the audit. The standard does not
otherwise impose new performance requirements, other than communications.
Because other PCAOB standards already require the auditor to perform
procedures underlying the communications required in Auditing Standard No.
16, and the standard primarily requires communication of the results of the
auditor's procedures, the Board does not anticipate a significant increase in
cost as a result of the implementation of the standard.
Some of the matters to be communicated under Auditing Standard No.
16 relate specifically to matters involving management's preparation of the
company's financial statements. In many companies, management might
communicate these matters or take the lead on communicating these matters
to the audit committee. The PCAOB does not have the authority to require
management to communicate to the audit committee. Additionally, certain
communications by the auditor are mandated by federal securities laws and
PCAOB Release No. 2012-004
August 15, 2012
Page 5
Securities and Exchange Commission ("SEC") rules.5/ Therefore, Auditing
Standard No. 16 establishes required communications by the auditor to the
audit committee but, at the same time, clearly recognizes and acknowledges
that management might communicate to the audit committee certain matters
related to the company's financial statements. In such circumstances, the
auditor does not need to communicate those matters at the same level of detail
as management, as long as certain conditions are met, as specified in the
standard.
Auditing Standard No. 16 is scalable for audits of companies of various
sizes and complexities. A company's size and complexity might affect the risks
of misstatements, the audit strategy, and other significant matters that warrant
the attention of the audit committee. Based on the specific company's
circumstances, the standard requires communications only to the extent that
the matters are relevant to the audit of the financial statements of the company
or of internal control over financial reporting. For example, an auditor of a
smaller, less complex company with fewer difficult auditing or financial reporting
issues may have fewer matters to communicate than the auditor of a larger,
more complex company.
II.
Background
On March 29, 2010, the Board proposed a standard, Communications
with Audit Committees (the "original proposed standard"), to improve the audit
by enhancing the relevance and effectiveness of the communications between
the auditor and the audit committee.6/ The original proposed standard was
informed by, among other things, the increased use of risk-based audit
methodologies, the emphasis on judgments and estimates in the financial
5/
See e.g., Section 10A(k) of the Exchange Act, 15 U.S.C. ¡ì 78j1(k); SEC Rule 2-07 of Regulation S-X ("SEC Rule 2-07"), 17 C.F.R. ¡ì 210.207; and Rule 10A-3 under the Exchange Act, 17 C.F.R. ¡ì 240.10A-3.
6/
Proposed Auditing Standard Related to Communications with
Audit Committees and Related Amendments to Certain PCAOB Auditing
Standards, PCAOB Release No. 2010-001 (March 29, 2010).
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