The Times They Are-a-Changin
The AICPA has issued several Statements on Auditing Standards (“SASs”) that, on the effective date, will impact the auditor’s report. These changes are included in SAS 134 through 140 and are effective for periods ending on or after December 15, 2021, per SAS 141. Therefore, they will initially be effective for the calendar year 2021 audits. Early implementation is permitted.
Usually, busy private business owners don’t need to concern themselves with the SASs. Why should they? However, owners should be aware of these recently issued SASs because crucial decisions must be about engaging the auditor to report on what is styled as “Key Audit Matters.” Some of the more noteworthy changes related to the non-public auditor’s report are summarized below.
- SAS 134 changes both the contents and arrangement of the auditor’s report for non-public companies. These changes are designed to provide greater transparency and improve communication for the end-users of the financial statements.
- Key Audit Matters. The Auditing Standards Board has added new AU-C Section 701, Communicating Key Audit Matters in the Independent Auditor’s Report. If the auditor is so engaged, the purpose of communicating key audit matters (“KAMs”) in the auditor’s report is to provide greater clarity regarding significant audit issues to the end-users of the financial statements. Many end-users thought the old standard boilerplate auditor’s report didn’t provide sufficient insight into the audit process. The KAM section of the SAS 134 auditor’s report is advanced in response to this concern.
The new standard does not require that KAMs be communicated in the auditor’s report. However, end-users, such as banks, absentee owners, and potential buyers may request that KAM communications be included to facilitate their analysis and understanding of the audit. Accordingly, company management may find it prudent to comply with this request and engage the auditor to include a KAM section in the auditor’s report.
KAMs include matters that, in the auditor’s professional judgment, are most significant in the audit. For example, the following are key matters areas that the auditor may communicate:
- Areas in the audit that pose a higher risk of material misstatement
- Significant estimates and related disclosures that are susceptible to material misstatement
- Areas of high complexity
- Transactions or events having a significant effect on the financial statements or the audit
- Areas of the audit that were challenging to the auditor
- Matters that required consultation by the auditor
If reporting on KAMs, the audit report should describe the following for each KAM:
- Why the KAM was considered to be significant
- How the matter was addressed during the audit
- Provide a reference to the financial statement areas or the related disclosures addressed by the KAM
- SAS 134 also:
- Expanded the descriptions of management’s responsibility about going concern evaluations
- Expanded descriptions regarding the auditor’s professional judgment, professional skepticism, going concern, and communication with the governing board.
- The arrangement of the auditor’s report has changed, as follows:
- The opinion paragraph is now the first paragraph. The thought here is that most readers of the audit report immediately focused their attention on the opinion paragraph, which, in the current report, is positioned at the end. So it makes sense to move it to the first paragraph, thereby stating up-front the auditor’s opinion on the financial statements.
- The basis for opinion follows the opinion paragraph
- KAMs, if requested by company management, is the next paragraph, followed by a description of each KAM
- The following paragraph describes the responsibilities of management, followed by
- A paragraph on the auditor’s responsibilities
NOTE: Both the management and auditor’s sections must now include each parties responsibilities for assessing the company’s going concern
- The final three sections are the firm’s signature, city and state, and date.
- SAS 134 also modified AU-C Section 706, Emphasis -of-Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. It clarified the relationship between Emphasis of Matters and KAMs if both are included in the auditor’s report.