The American Institute of Certified Public Accountants (AICPA) on Oct. 23, 2019, said it updated interpretive guidance related to the Public Company Accounting Oversight Board’s (PCAOB) new critical audit matters (CAMs) requirement.
The update adds Interpretation No. 5, “Communicating Critical Audit Matters When Reporting on Audits Conducted in Accordance With Auditing Standards Generally Accepted in the United States of America and the Standards of the PCAOB,” (AU-C Section 9700A par. .22-.26) of AU-C Section 700A, “Forming an Opinion and Reporting on Financial Statements.”
Auditing Interpretation No. 5 helps auditors comply with AU-C Section 700A in the context of the PCAOB reporting standards when CAMs are required. The PCAOB writes audit standards for public companies that file with the Securities and Exchange Commission (SEC) while the AICPA sets standards for private companies.
In response to investor demand to make the audit report section of a regulatory filing more useful, the PCAOB in June 2017 issued the requirement for CAMs in Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards. The rule represents a major change to the brief pass-fail auditor reports that have been in place for decades. It requires auditors to add a discussion of CAMs that arose during the audit. The PCAOB defines critical matters as issues that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements and involved especially difficult judgment from the auditor.
The PCAOB also changed other content and form of the auditor’s report. The standard became effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. For smaller companies, it is effective for fiscal years ending on or after Dec. 15, 2020. Large accelerated filers, according to the SEC rules, are companies with public floats of more than $700 million.
Release No. 2017-001 says that auditors in certain situations may be required by law or regulation or voluntarily agree to audit using PCAOB standards for non-public companies. Generally Accepted Auditing Standards (GAAS) spell out the appropriate form of report when an auditor issues a report referencing both GAAS and the standards of the PCAOB.
“When conducting an audit of financial statements in accordance with the standards of the PCAOB and the audit is not within the jurisdiction of the PCAOB as defined by the Sarbanes-Oxley Act of 2002 (the Act), as amended, the auditor is required to also conduct the audit in accordance with GAAS,” AU-C Section 700A says. “In such circumstances, when the auditor refers to the standards of the PCAOB in addition to GAAS in the auditor's report, the auditor should use the form of report required by the standards of the PCAOB, amended to state that the audit was also conducted in accordance with GAAS.”
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