You may have heard that we issued a new auditor reporting standard effective for audits of financial statements for periods ending on or after December 15, 2020. The standard was designed to enhance the relevance and transparency of the auditor’s report. One key change is that with the new standard, the auditor’s opinion comes first. It’s like opening a box of Cracker Jack at a ball game and seeing the prize right on top. No need to fish through the rest of the good stuff in the box to find it.
The new Statement on Auditing Standards Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, known as SAS No. 134, contains four sections that replace AU-C Sections 700, 705 and 706. There’s also a new section: 701 in the AICPA’s Professional Standards.
Here are the top five things you should know about the new auditor reporting standard:
Batting first, there’s a specific order. For the first time, Generally Accepted Auditing Standards (GAAS) requires the Opinion section to be placed first, followed by the Basis for Opinion.
The Basis for Opinion section is new. This section provides financial statement users with heightened clarity of the auditor’s obligations relating to independence and provides transparency that there are ethical requirements relating to the particular audit engagement.
Going concern is highlighted. SAS No. 134 requires enhanced reporting on going concern. This includes information about management’s responsibilities to evaluate whether conditions or events raise substantial doubt about an entity’s ability to continue as a going concern (when required by the financial reporting framework). It also includes information about the auditor’s responsibilities to conclude whether, in the auditor’s judgment, there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. This standard amends AU-C Section 570 to include a separate section in the auditor’s report when substantial doubt exists.
The auditor’s responsibilities section is revamped. This revised section of the auditor’s report explains what the auditor’s responsibilities are for the audit, including the auditor’s communications with those charged with governance.
There is a framework for determining, communicating and documenting key audit matters (KAM). Section 701 of SAS No. 134 is new. The standard does not require auditors to communicate KAM, but should be followed when the auditor is engaged to communicate KAM in the auditor’s report.
Now that the standard has been finalized, you should take the time to review it and start considering how it will affect you and your work. This standard also amends various AU-C sections in the AICPA Professional Standards that you’ll want to become familiar with. You’ll also want to update your firm’s methodologies and guidance, consider the training needs for engagement teams and start educating identified users about the new form and content of the auditor’s report. I’d also recommend that you check out our two-page "At a Glance" document highlighting key information on the standard.
The ASB’s goal was to enhance the relevance of the auditor’s report. Similarly, Frito-Lay, the maker of Cracker Jack, adapted to the changing times by getting rid of the physical prizes in Cracker Jack boxes and replacing them with QR codes.