Howard Zangwill, CPA, Managing Director of Audit and Accounting in the Oakland office.
Howard ZangwillCPAview bio

The Standard Auditor Report Gets a Makeover

12/3/2021

Upcoming 2021 calendar year-end audits for privately held clients will be subject to new auditor reporting standards issued by the AICPA’s Auditing Standards Board (ASB).
 
The “standard” report an auditor issues on an organization’s financial statements was developed in 1988 and has only had minor tweaks since. But, in 2022, the report is getting a makeover in response to feedback from the users of financial statements.
 
The AICPA updated the form and content requirements for financial statement auditors’ reports, effective for audit periods ending after Dec. 15, 2021. This suite of standards (Statements on Auditing Standards Nos. 134 – 141) clarify responsibilities during the audit, including those of the management team.
 
Because SAS No. 134 affects the content of the audit report, clients requiring audits will want to pay particular attention to this standard and be aware of the following changes prior to their first audit with the new report:

  • The emphasis on the auditor’s opinion and independence
  • Introducing Key Audit Matters (KAMs)
  • The clearly defined responsibilities of management and auditor for going concern issues

 These changes will create more work for the auditor and will result in an increase in audit costs.

Emphasis on the Auditor’s Opinion and Independence

The opinion in an audit report is the auditor’s conclusion as to whether the financial statements are in accordance with the applicable accounting standards, in all material respects. It is considered the most important part of the report and as a result, the new audit report format will include the auditor’s opinion first, followed by the “Basis for Opinion” section.
 
Previously, the “Basis of Opinion” was included only in reports with modified opinions – now, it will be included in all reports. The “Basis for Opinion” section is intended to:

  • Report that the auditor followed auditing standards generally accepted in the United States (U.S. GAAS) in the audit
  • Provide a statement about required independence and other ethical responsibilities
  • Describe the auditor’s responsibilities
  • State whether the auditor believes the audit evidence obtained is sufficient and appropriate for the opinion given

Introducing Key Audit Matters (KAMs)

Previously, the Public Company Accounting Oversight Board (PCAOB) has required public companies to receive information on Critical Audit Matters (CAMs) that are identified by the auditor during the financial statement audit.

Now, SAS No. 134 allows private companies to also receive a report on areas of focus or Key Audit Matters (KAMs) if the private company so chooses. KAMs are defined as:

  • Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

If a private company decides they wish to engage their auditor to include KAMs in the audit report, it will describe, in the auditor’s judgement, the areas that the auditor found to be of most significance in the financial statement audit.
 
If elected, the KAMs report would be included in the auditor’s report after the basis of opinion paragraph. the auditor’s report should include a section headed “Key Audit Matters”.
 
KAMs will require more documentation and audit time, as the auditor will have to evaluate and document why these areas were selected and how they were addressed in the audit.

Responsibilities of Management and Auditor for Going Concern Issues

SAS No. 134 expands the audit report involving the responsibilities of management and responsibilities of the auditor. The report will clearly state it is the management’s responsibility to prepare and present the organization’s financial statements in accordance with applicable financial reporting framework, and to maintain an internal control environment that is free from material misstatement. It also will clarify that if applicable, it is the management’s responsibility to evaluate whether the organization is at a risk for going concern.
 
The new format also clearly defines the auditor responsibilities to obtain reasonable assurance (defined as a high level but not absolute assurance) about whether the financial statements are free from material misstatement and to issue an auditor’s report that includes the auditor’s opinion.

The new format also includes additional details on the auditor’s responsibilities during the audit including communication with those charged with governance about scope, timing, significant findings, internal control, and other matters uncovered during the audit. If the auditor has substantial doubt about the entity’s continuation as a going concern, the auditor will list this in the Emphasis-of-Matter section of the report.

Additional changes

The changes discussed above are by no means a comprehensive list – just the highlights. The overall changes are quite extensive and will take time for everyone to get used to even though the intent is to may make it easier for financial statement users to understand the results of the audit, as well as the auditor’s and management’s responsibilities. The changes will require auditors to pay more attention to the entity’s financial statement disclosures resulting in revisions to the contents of engagement letters to be consistent with the new report.

Preparing for your 2022 Audit

Talk to your auditor about how the audit report changes will affect your engagement. Also, if your organization is considering the KAM election, you will want to discuss what to expect from the KAMs reporting, including the additional costs involved. While not required for not-for-profits, some organizations may decide to request the auditor include a discussion of such matters in the report, from the standpoint of transparency “best practices.”
 
If you have any questions about the new auditor’s report or your specific situation, RINA’s Audit team, can help. For additional information, please contact a member of our audit team.

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