Changes in the Way Auditors Report
- Posted by admin
- 27 September 2013
The Public Company Accounting Oversight Board (PCAOB) in USA has proposed important and very sweeping changes to the reporting model used by auditors to identify and classify what are known as “critical audit matters.” The PCAOB is a non-profit organization formed by Congress for the purpose of overseeing the auditing process of public companies. The organization is supposed to incorporate into its work certain activities that protect the interests of investors.
PCAOB Looking out for Investors
There are other responsibilities given to the PCAOB that are in the best interest of the public such as ensuring that independent auditing reports are accurate and informative. In addition, members of the PCAOB oversee audits that involve broker-dealers. They strive to protect the investor by reviewing compliance reports that are filed pursuant to federal securities laws. The formation of new standards and amendments aimed at addressing a variety of scenarios is part of a recent proposal by the board, and members of the public have until December 11 to file a comment on the PCAOB site.
New Standards Proposed
Under the new standards proposed by the PCAOB, auditors would need to make a statement of independence explaining that they are public accounting firms, independent from the company they are auditing, registered with the PCAOB. The auditing firm would also have to disclose the year they began working for the company. The auditing firms would also need to incorporate into an annual report the correct procedures and evaluations that they perform as well as make sure they are compliant with all rules associated with reporting fraud and making special notes to financial statements.
Critical Audit Matters
The purpose of the proposal is to change auditing reports without changing the procedures performed by auditors. They would need to make sure they report the most difficult, subjective or complex judgments in their audits, and the aspects of the process that caused the most difficulty in obtaining sufficient or appropriate evidence. They should also incorporate into the report those aspects of the process that presented the most difficulty when it was time for the auditor to state an opinion on a financial statement.
Once critical audit matters are determined, auditors would need to file reports that contain some vital information. First of all, the critical audit matter would have to be clearly identified in the reports. The reasons that the particular matter was deemed critical should be explained. Finally, the auditor should make reference in the report to relevant financial statement accounts and disclosures that are related to the critical audit matter. In addition, auditors would also be required to evaluate other information that is included in an annual report like certain financial data and management’s analysis of audited financial statements.
In the event a material inconsistency or misstatement between relevant information and audited financial statements is discovered, an auditor would be required to go through certain procedures according to the PCAOB proposal. Among other things, the auditor would have to report the results of the evaluation that turned up any inconsistencies or misstatements.
The above change to the audit report is at a preliminary stage and it will be interesting to note the reactions of the auditors in USA. If adopted, these changes will eventually find its way into Singapore.