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New Audit Standards for Entities with Fiscal Years Ending after December 15, 2021

November 15, 2021

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After a one-year delay in implementation due to COVID-19, auditors will be required to implement a new suite of audit standards intended to provide more transparency into the basis of the audit opinion and more closely align the reporting requirements of U.S. generally accepted auditing standards with those of the PCAOB and International Auditing and Assurance Service Board. Audits of entities with fiscal years ending after December 15, 2021, must follow the new audit standards (collectively referred to as the “Reporting Suite”):

The most noticeable change will be a new auditors’ report, which rearranges the layout to present the opinion first, emphasizes the requirement for the auditor to be independent, and more directly expresses the responsibilities of management for the preparation of financial statements and auditors when conducting the audit.

SAS No. 134 also introduces an opportunity for private entities to provide additional transparency into audits by engaging their auditors to report Key Audit Matters (KAM). Reporting KAM is optional and represents those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements. KAMs are included in the auditors’ report and are tailored to each engagement and could include material transaction classes, significant estimates, significant unusual transactions, contingencies, etc. If auditors are engaged to report on KAM, additional time will be necessary, including time to evaluate significant audit findings, document support for the matters chosen and draft the additional content. Beyond the additional time and cost involved with reporting KAM, auditees should consider that the additional reporting could disclose unfavorable information about the entity’s accounting practices. Given these considerations, auditees will have to carefully weigh the costs and benefits of engaging auditors to report KAM.

SAS No. 135 amends audit standards related to communications with those charged with governance, related parties and the consideration of fraud and is intended to more closely align AICPA guidance with PCAOB guidance. As a result of the new guidance, expect more emphasis on related party transactions and significant unusual transactions identified during the audit.

Also included in the “Reporting Suite” are new requirements related to audits of employee benefit plans subject to ERISA, new requirements pertaining to the review of information included in annual reports and a modification to the definition of materiality that aligns audit standards more closely to the definition used within the U.S. judicial system.

Additional changes are coming for 2022 and 2023 with SAS No. 142-145 affecting the evidence obtained by auditors to support their opinions, procedures required for auditing estimates and procedures required to assess and respond to risk.

While the new requirements mainly affect the auditor, auditees should anticipate questions from stakeholders regarding the new auditors’ report, additional focus on related party transactions and enhanced discussions between their auditors and those charged with governance regarding significant risk. Contact us with questions.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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