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PCAOB adopts Auditing Standard on Communications with Audit Committees

January 21, 2015

On August 15, 2012, PCAOB adopted Auditing Standard No. 16, Communications with Audit committees, and related amendments to other PCAOB standards. The standard supersedes PCAOB's interim auditing standards AU sec. 310, Appointment of the Independent Auditor, and AU sec. 380, Communication with Audit Committees, and amends other PCAOB standards.

The standard establishes requirements that enhance the communications between the auditor and the audit committee on significant audit and financial statement matters. 


The new standard is intended to improve the quality of audit and assist audit committees in fulfilling their responsibilities by the two-way communication between the auditors and the audit committee.


Requirements Set to Achieve the Objectives under Auditing Standard No. 16 Appointment and Retention

The new standard rephrases current requirements of auditors to communicate significant issues discussed with management regarding the appointment or retention of the auditor. The new standard also requires a written engagement letter to a proper party every year to ensure the communication of audit objective, auditor's responsibilities and management's responsibilities.


Obtaining Information and Communicating the Audit Strategy


The new standard requires the auditor to ask the audit committee whether it is aware of matters relevant to the audit, including but not limited to knowledge of violation or possible violation of laws or regulations. The auditor also needs to communicate an overview of the overall audit strategy, including timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks. The communication of the audit strategy should include the following matters:


Information about the nature and extent of specialized skills or knowledge needed in the audit, the extent of the planned use of internal auditors, company personnel or other third parties, and other independent public accounting firms, or other persons not employed by the auditor that are involved in the audit;


The basis for the auditor's determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors.


Results of the Audit

Most of the requirements included in the existing standard are carried over to the new standard, such as disagreements with management and difficulties encountered in performing the audit. Meanwhile, the new standard expands the existing requirements regarding the communication of accounting policies and practices, estimates, and significant unusual transactions to include the communication of reasons certain policies and practices are considered critical, any significant changes management made to the process used to develop critical accounting estimates, and the timing, size, nature, and business rationale of significant unusual transactions.


Other Matters

The new standard also adds the requirements to communicate the auditor's evaluation of the company's ability to continue as a going concern and to inform the audit committee if the auditor is modifying the opinion or adding an explanatory paragraph in the auditor's report.


Form and Documentation of the Communications

Communication required by the new standard can be either orally or in writing. 


Timing of Communications

The new standard requires the communication with the whole audit committee to be completed timely and before the issuance of the auditor's report.


Effective Date

The new standard and related amendments, if approved by the SEC, will be effective for public company audits of fiscal periods beginning after Dec. 15, 2012.


David Grossman

Written by David Grossman

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