SEC Approves PCAOB Auditing Standard No. 16, Communications with Audit Committees

February 1, 2013 | Comments Off on SEC Approves PCAOB Auditing Standard No. 16, Communications with Audit Committees
Posted by John L. Sikora

The Public Company Accounting Oversight Board (“PCAOB”) adopted , Communications with Audit Committees, which supersedes the interim standards of AU sec. 380, Communication with Audit Committees, and AU sec. 310, Appointment of the Independent Auditor.  Auditing Standard No. 16 is intended to improve audits by enhancing the relevance, timeliness and quality of communications between auditors and audit committees.

  Auditing Standard No. 16 represents a departure from AU sec. 380, which indicated that audit committee communications are incidental to the audit and are not required to occur prior to the issuance of the audit’s report.  In contrast, Auditing Standard No. 16 recognizes the importance of communications with the audit committee and requires the auditor to communicate the audit strategy and results of the audit to the audit committee before issuing the auditor’s report so that there is an opportunity to discuss and act upon the matters communicated.  Other matters that the auditor is required to communicate to the audit committee before issuing the auditor’s report, and in certain cases, before commencing the audit, include:

  • The terms of the engagement, including the objective of the audit, the responsibilities of the auditor and the responsibilities of management, which should be reflected in the audit engagement letter;
  • The significant risks identified by the auditor in its risk assessment procedures;
  • Significant transactions that are outside the normal course of business for the company or that otherwise appear to be unusual, and the auditor’s understanding of the business rationale for such transactions;
  • A description of the process management used to develop critical accounting estimates, significant assumptions used in critical accounting estimates that have a high degree of subjectivity, and any significant changes in the process to develop critical accounting estimates or significant assumptions, including the reasons for the changes and the effects of the changes on the company’s financial statements;
  • The auditor’s evaluation of whether the presentation of the company’s financial statements and related disclosures are in conformity with the applicable financial reporting framework;
  • The auditor’s evaluation of the company’s ability to continue as a going concern; for example, if the auditor believes there is substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time and the conditions and events giving rise to such belief;
  • Any significant difficulties that the auditor encountered during the audit, such as significant delays by management, unavailability of company personnel and unwillingness by management to provide information needed for the audit; and
  • Any disagreements between the auditor and management about matters that, individually or in the aggregate, could be significant to the company’s financial statements or the auditor’s report.

The Securities and Exchange Commission approved Auditing Standard No. 16 on December 17, 2012, and it is now effective for audits of fiscal years beginning on or after December 15, 2012.  In addition, the SEC approved Auditing Standard No. 16 for application to the audits of emerging growth companies (as defined in the Securities Exchange Act of 1934, as amended).  The Jumpstart Our Business Startups Act, or the “JOBS Act,” provides that any PCAOB rules adopted after April 5, 2012 do not apply to audits of emerging growth companies unless the SEC determines that the application of such rules to emerging growth companies is necessary or appropriate in the public interest.

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