SEC Trends & Developments - Winter 2012 - PCAOB Adopts Auditing Standard No. 16, Communications with Audit Committees
On August 15, 2012, the Public Company Accounting Oversight Board ("PCAOB") adopted Auditing Standard No. 16, Communications with Audit Committees, which superseded the Board's interim standards AU 380, Communication with Audit Committees and AU 310, Appointment of the Independent Auditor. The new standard retains and enhances existing communication requirements, incorporates certain SEC auditor communication requirements with audit committees, and adds some new communication requirements linked to auditor performance requirements under the PCAOB standards.
The objectives of the new standard are for the auditor to communicate to the audit committee the auditor's responsibilities related to the audit and to establish an understanding of the terms of the audit with the audit committee; to allow the auditor to obtain information relevant to the audit from the audit committee; to communicate to the audit committee an overview of the overall audit strategy and the timing of the audit; and to provide the audit committee with timely observations arising from the audit that are significant to the financial reporting process.
Even though many of the existing communication requirements are retained in the new standard and certain existing SEC requirements have been incorporated, there are some new items to communicate. The auditor is now required to inquire if the audit committee is aware of any matters relevant to the audit, including but not limited to violations or possible violations of laws or regulations. Significant aspects of the audit such as the planned use of other auditors to audit certain components or subsidiaries, the basis for the auditor's determination that they can serve as the principal auditor, consultations on difficult or contentious matters outside the engagement team, the need for specialized skill and knowledge to complete the audit, and any concerns regarding management's anticipated application of accounting pronouncements that are not yet effective are all new communication requirements under the new standard. Additionally, communications are required to occur before the issuance of the audit report.
The communication can be made in writing or orally. The PCAOB wanted to encourage effective two-way communication throughout the audit and expect that the communication may be done in many different forms. Robust, informative communication tailored to the client and specific circumstances will contribute to an effective audit.
The new standard was approved by the SEC and is effective for fiscal years beginning after December 15, 2012. In addition, under the JOBS Act, the SEC would determine if this standard would become effective for emerging growth companies.
This article was previously published in EisnerAmper's Trends & Developments.
SEC Trends & Developments - Winter 2012 Issue