Defining Issues 2010 04, Issue 18 - PCAOB Proposes Auditing Standard  on Communications with Audit Committees
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Defining Issues 2010 04, Issue 18 - PCAOB Proposes Auditing Standard on Communications with Audit Committees

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5 Pages
English

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®Defining Issues KPMG LLPApril 2010, No. 10-18PCAOB Proposes Auditing Standard on Communications with Audit CommitteesThe Public Company Accounting Oversight Board (PCAOB) recently released for 1comment a proposed auditing standard, Communications with Audit Committees. The PCAOB’s primary objectives in proposing a new auditing standard were increasing the relevance and effectiveness of communications between the auditor and the audit committee and emphasizing the importance of effective, two-way communications. Comments on the proposed auditing standard are due by May 28, 2010. The PCAOB said its proposal was influenced by a number of factors including the increased use of risk-based audit methodologies and the emphasis on judgments and estimates in financial reporting. Also, Standing Advisory Group members supported a new standard that would enhance auditor communications with audit committees, 2especially in the areas of disclosures and critical accounting estimates. The proposed auditing standard is expected to strengthen and expand the role of the audit Establishing a Mutual 3committee. Understanding of the Audit 2The PCAOB stated that the proposed auditing standard’s four objectives for the Overview of the Audit Strategy and Timing of the Audit 2 auditor’s communications with the audit committee were:Timely Observations That 1. Explaining the responsibilities of the auditor and establishing a mutual Are Significant and Relevant ...

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April 2010, No. 10-18
® Defining Issues  K P M GL L P
PCAOB Proposes Auditing Standard on Communications with Audit Committees The Public Company Accounting Oversight Board (PCAOB) recently released for 1 comment a proposed auditing standard, Communications with Audit Committees. The PCAOB’s primary objectives in proposing a new auditing standard were increasing the relevance and effectiveness of communications between the auditor and the audit committee and emphasizing the importance of effective, two-way communications. Comments on the proposed auditing standard are due by May 28, 2010. The PCAOB said its proposal was influenced by a number of factors including the increased use of risk-based audit methodologies and the emphasis on judgments and estimates in financial reporting. Also, Standing Advisory Group members supported a new standard that would enhance auditor communications with audit committees, 2 especially in the areas of disclosures and critical accounting estimates.The proposed auditing standard is expected to strengthen and expand the role of the audit Establishing a Mutual 3 committee.  Understandingof the Audit2 The PCAOB stated that the proposed auditing standard’s four objectives for the Overview of the Audit Strategy  andTiming of the Audit2auditor’s communications with the audit committee were: Timely ObservationsThat 1. Explainingthe responsibilities of the auditor and establishing a mutual  AreSignificant and Relevant understanding of the audit engagement;  tothe Financial Reporting  Process3 2. Givingan overview of the audit strategy and the timing of the audit; Evaluating Two-Way 3. Providingtimely observations that are significant and relevant to the financial  Communications4 reporting process; and Effective Date5 4. Evaluatingthe adequacy of the two-way communications to support the ©2001-2010 KPMG LLP, a Delaware limited liability partnership and theobjectives of the audit. U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 22114NSS Photo: GettyImages_200378285-001 1 PCAOB Release No. 2010-001, Proposed Auditing Standard Related to Communications with Audit Committees and Related Amendments to Certain PCAOB Auditing Standards, available at www.pcaobus.org. 2 The Standing Advisory Group is convened by the PCAOB two or three times a year to advise on the development of auditing and related professional practice standards. Standing Advisory Group members include auditors, investors, public company executives, and others. 3 Sections 201, 202, and 204 of the Sarbanes-Oxley Act of 2002, available at www.pcaobus.org, discuss the role of the audit committee.
Defining IssuesApril 2010, No. 10-182
Many of the required communications in the PCAOB’s interim auditing standards 4 remain in the proposed auditing standard.The PCAOB adopted its existing auditing standards on an interim basis when it was established by the Sarbanes-Oxley Act of 2002.The law made public company audit committees responsible for the appointment, compensation, and oversight of the company’s independent auditor, and required the auditor to report directly to the audit committee.
The proposed auditing standard also would introduce new communication requirements and would propose changes to some existing requirements.The following is a summary of the key new requirements in the proposed auditing standard.
Establishing a Mutual Understanding of the Audit The auditor would establish a mutual understanding of the terms of the audit engagement with the audit committee and record its mutual understanding of the terms of the audit in an audit engagement letter.The proposed auditing standard would require that the engagement letter be provided to the audit committee annually.
Overview of the Audit Strategy andTiming of the Audit Auditors would be required to ask the audit committee whether it is aware of any complaints or concerns about accounting or auditing matters.The proposed auditing standard would require the auditor to communicate the following audit strategy details and timing:
• Anoverview of the audit strategy, including a discussion of the significant risks identified during the auditor’s risk-assessment procedures, and the timing of the audit;
• Significantchanges to the planned audit strategy or the significant risks initially identified;
• Theauditor’s determination of whether persons with specialized skill or knowledge are needed to apply the planned audit procedures or evaluate audit results;
• Theauditor’s consideration of, and planned use of, the company’s internal audit function to perform audit procedures;
• Theextent to which the auditor plans to use the work of company personnel (in addition to internal auditors) and third parties working under the direction of management or the audit committee in the audit of internal control over financial reporting;
• Theroles, responsibilities, and locations of firms participating in the audit; and
• Thebasis for the auditor’s determination that it can serve as principal auditor when other auditors perform part of the audit.
4 AU Section 310, Appointment of the Independent Auditor, and AU Section 380, Communication with Audit Committees, of the PCAOB interim auditing standards, available at www.pcaobus.org.
©2001-2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.22114NSS
Defining IssuesApril 2010, No. 10-183
Timely ObservationsThat Are Significant and Relevant to the Financial Reporting Process The proposed auditing standard would include the following new or expanded communication requirements related to a company’s critical accounting policies and practices:
• Anevaluation of management’s disclosures related to the critical accounting policies and practices, along with any significant modifications proposed by the auditor that were not made by management;
• Thereasons certain policies and practices are considered critical by the auditor including those not considered critical by management; and
• Howcurrent and anticipated future events generally may affect the auditor’s determination about whether certain policies and practices are considered critical.
The proposed auditing standard would include the following new or expanded communi-cation requirements related to a company’s critical accounting estimates:
• Adescription of management’s process to develop critical estimates and how they are subsequently monitored by management;
• Management’ssignificant assumptions used in critical estimates that have a high degree of subjectivity;
• Anysignificant changes to assumptions or processes made by management to critical estimates in the year under audit, a description of the reasons for the changes, the effects on the financial statements, and the information that supports or challenges such changes;
• Whencritical estimates involve a range of possible outcomes, how the recorded estimates relate to the range, and how various selections within the range would affect the company’s financial statements; and
• Theauditor’s evaluation of the reasonableness of the process used by management to develop critical accounting estimates.
The proposed auditing standard also would require the auditor to communicate the anticipated application by management of accounting or regulatory pronouncements that have been issued but are not yet effective that may have a significant effect on financial reporting.
Other new or expanded requirements related to the auditor’s communication of timely observations that are significant and relevant to the financial reporting process would include:
• Ifapplicable, that the auditor has determined that potential bias exists in manage-ment’s accounting estimates;
• Significantaccounting matters for which the auditor has consulted outside the engagement team;
©2001-2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.22114NSS
Defining IssuesApril 2010, No. 10-184
• Certainmatters relating to the auditor’s evaluation of a company’s ability to continue as a going concern including:
Conditions and events that, when considered in the aggregate, indicate that there could be substantial doubt about the company’s ability to continue as a going concern;
Information that mitigated the auditor’s doubt, if such doubt was mitigated;
The auditor’s assessment of management’s plans to overcome the conditions and events and management’s ability to implement the plans;
The effects, if any, on the financial statements and the adequacy of the related disclosures;
The effects, if any, on the auditor’s report; and
If applicable, management’s unwillingness to make or extend its assessment of the company’s ability to continue as a going concern when requested by the auditor;
• Alluncorrected misstatements related to accounts and disclosures that were presented to management;
• Thebasis for the auditor’s determination that uncorrected misstatements were immaterial;
• Correctedmisstatements that might not have been detected except through auditing procedures performed, including the implications that corrected misstatements might have on the financial reporting process;
• Reasonsfor expected modifications to the opinion or the addition of an explanatory paragraph in the auditor’s report, and the proposed wording of the report; and
• Othermatters from the audit that are significant to the oversight of the financial reporting process, including when the auditor is aware of complaints or concerns raised about accounting or auditing matters.
The proposed auditing standard would permit management to communicate these matters as they relate to accounting policies, practices, and estimates.The auditor would be required to determine whether all matters were adequately described and, if not, communicate any omitted or inadequately described matters to the audit committee.
Auditor communications could be made either orally or in writing and would require the auditor to document its communications in sufficient detail to enable an experienced auditor, having no previous connection with the engagement, to understand the communications.The proposed auditing standard would require the auditor to communicate to the audit committee before issuing its audit report.
Evaluating Two-WayCommunications The proposed auditing standard would require the auditor to evaluate whether the two-way communications with the audit committee adequately supported the audit’s
©2001-2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.22114NSS
This is a publication of KPMG's Department of Professional Practice 212-909-5600
Contributing authors: Thomas J. Ray Harold I. ZeidmanCecil Mak
Earlier editions are available at: www.us.kpmg.com/definingissues
Defining Issues® is a registered trademark of KPMG LLP. ©2001-2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.22114NSS
objectives. If the auditor determined that the communications were inadequate, it would be required to evaluate the effects, if any, on its assessment of the risk of material misstatement and on its ability to obtain sufficient appropriate audit evidence, and take appropriate action. If the situation could not be resolved, the auditor would consider communicating with the full board of directors, modifying its auditor’s opinion on the basis of a scope limitation, and/or withdrawing from the audit engagement.
Effective Date The PCAOB proposed that the auditing standard be effective for audits of fiscal years beginning after December 15, 2010. After the PCAOB receives comments, it intends to either re-propose the auditing standard for additional comments during the third quarter of 2010 or adopt a final standard that would be submitted to the SEC for approval. Theproposed auditing standard would not affect communications required by other PCAOB standards or rules or other regulatory bodies’ rules.The proposed auditing standard includes a list of communications required by other PCAOB standards and rules.
The descriptive and summary statements in this newsletter are not intended to be a substitute for the proposed auditing standard or what might be adopted or for any other PCAOB requirements. Readers should refer to the texts of the PCAOB proposal or other requirements, consider their particular circumstances, and consult their accounting and legal advisors.