Auditors and Audit Report Changes
- Posted by admin
- 02 August 2014
Auditors in Favor of Curbing Proposed Audit Report Changes
The Public Company Accounting Oversight Board, simply known as PCAOB, has recently come out with a proposal to implement some changes in the auditor’s report. This is the result of years of study and deliberation.
The PCAOB is a non-profit, private-sector corporation created by virtue of the Sarbanes-Oxley Act (2002) for the purpose of overseeing accounting professionals who offer independent audit services for publicly-listed companies.
The proposal for a new auditing standard, issued on 13 August, 2013, would require auditors to mention the critical audit matters or CAMs in their reports on the Financial Statements (FS) of their corporate clients. These include businesses with Singapore company registration.
As defined by the PCAOB, CAMs are specific issues that presented the most difficult, complex or subjective auditor judgments; those that the auditor found most difficult to obtain sufficient appropriate evidence for during the course of the audit; or those that posed the most difficulty to the editor in coming up with an opinion on the client’s financial statements.
Based on the proposal, the PCAOB would expect to find in majority of audit reports matters of pressing importance that the editors have:
- communicated in the documents of engagement completion,
- forwarded for review by the engagement quality reviewers,
- brought to the attention of the audit committee, or
- any combination of the three conditions above, based on the proposed standard
However, some auditors are of the opinion that the “critical audit matters” that should be included in the reports are those that gave them the most headaches and sleepless nights during the audit engagement, or the problem areas that they encountered which they have previously communicated to the audit committee, rather than including each and every item that merited a closer look or deeper investigation.
This conclusion on the general sentiment of auditors of companies, businesses that underwent Singapore company formation included, is based on the study conducted by the PCAOB. In a field test done that involved 51 audits, the results showed that 98% of “critical audit matters” that were identified, had been previously elevated to the audit committee. Audit teams from a total of nine auditing firms were involved in the audit of the 51 companies included in the test.
According to the audit teams involved, they observed that limiting the matters for consideration only to the “critical audit matters” that have been brought to the attention of the audit committee might prove to be more effective and may be a more efficient and effective way to identify the matters that are vital to the audit engagement. This is according to Executive Director Cynthia M. Fornelli of the CAQ or Center for Audit Quality in her June 19 correspondence to the PCAOB that contained the field test results.
The Matter of Materiality
According to the CAQ, including a specific requirement to the PCAOB-proposed audit report changes, such as the concept of materiality as one of the relevant considerations in CAM identification, would be highly constructive and beneficial. This will be of big help to auditors in their efforts to finalize the roster of potential critical audit matters.
Fornelli added that majority of the accounting firms involved recommend the inclusion of the concept of materiality in the determination of critical audit matters. This is because although the recommendation did not explicitly call for auditors to consider the critical matter’s materiality in determining whether to include it in the report or not, the audit engagement teams took materiality into consideration.
The new auditing standard is set to take effect for financial statement audits for fiscal years starting on or after December 15, 2015. This, however, is still subject to the approval of the Securities and Exchange Committee.
Chief Financial Officers of firms, counting those with Singapore company registration, are generally opposed to the proposal of the PCAOB. CFO Carol Tome of Home Depot, one of the finance heads who gave comments on the proposal during the deliberation stage before its release in its current form, probably echoed the sentiments of other CFOs through the letter she wrote to the PCAOB.
She mentioned that management, armed with the audit committee’s oversight and input, is best equipped to determine the completeness and accuracy of the financial disclosures, and whether they provide the community of investors with the proper insight into the business. On the other hand, the auditor of the company is not in the best position to independently report on company information more than what is required by the SEC and GAAP regulations to be disclosed by management.