Weaver: What audit committees need to know about Auditing Standard No. 16

The communication between independent auditors and audit committee members of public companies will change in 2014 with Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16.
The PCAOB’s standard is effective for audits of fiscal years beginning after Dec. 15, 2012.

“There’s an emphasis on two-way communication and the timeliness of communication,” says Dale Jensen, partner-in-charge of the Public Company Audit Practice at Weaver. “These requirements should only help the audit committee better understand the audit process and the results.”

Smart Business spoke with Jensen about PCAOB Auditing Standard No. 16’s implementation and how it changes auditor responsibilities.

How will communication between auditors and audit committees change?

Generally, the standard seeks to create more effective and timely two-way communication between the auditor and audit committee, including sharing what discussions have occurred between the auditor and management during the audit. It standardizes what is communicated and when.

Part of the standard addresses the appointment and retention of auditors — general information relevant to the planning of the audit. Committee members need to understand what auditors will discuss with management prior to the auditor retention. Many public companies won’t see a change here if they are following best practices. But some concepts have been expanded, such as requiring auditors to ask the committee if they are aware of any matters relevant to the audit, including knowledge of possible law violations.

The standard also discusses the audit’s results. Auditors already were disclosing many of the required items, such as significant and critical accounting estimates, and significant and unusual transactions. Now, the auditor must also communicate:

  • Difficult or contentious matters about which they consulted with management.
  • Matters that resulted in a going concern consideration, how the matter was alleviated, and the effects on the financial statements and audit opinion.
  • Any departures from the standard report.

The auditor also must share the results with the audit committee before issuing an opinion on the financial statements. This provides committee members with the opportunity to gain an understanding and address questions with the auditors prior to the issuance of the opinion and Form 10-K filings with the Securities and Exchange Commission.

Does the standard specify what type of communication is required?

Some things must be in writing, such as engaging an auditor, but, overall, communication can be written or verbal.

Auditors can communicate the required items solely in writing. However, verbal communication can help committee members truly understand the nuances of what’s being reported. For example, auditors may share audit results over a conference call or at an in-person meeting. This opens up the dialog and creates an opportunity for the audit committee to ask questions to gain a better understanding of the audit process, specific findings, etc. The key here is to allow adequate time for the auditors and audit committee members to have these discussions and to work through any issues or questions that arise.

How much impact will the standard have?

Overall, the impact of this standard will be positive because it’s enhancing two-way communication between auditors and audit committees about matters of importance to the audit and the financial statements. How much impact it has will really depend on the company, what its issues are and how information has typically been communicated to the audit committee in the past.

Dale Jensen, CPA, CFE, is partner-in-charge of the Public Company Audit Practice at Weaver. Reach him at (800) 332-7952 or [email protected].

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