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”):
- Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements (SAS No. 134)
- Omnibus Statement on Auditing Standards—2019 (SAS No. 135)
- Statement on Auditing Standards, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (SAS No. 136)
- The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports (SAS No. 137)
- Amendments to the Description of the Concept of Materiality (SAS No. 138 and SSAE No. 20)
- Amendments to AU-C Sections 800, 805, and 810 to Incorporate Auditor Reporting Changes from SAS No. 134 (SAS No. 139)
- Amendments to AU-C Sections 725, 730, 930, 935, and 940 to Incorporate Auditor Reporting Changes from SAS Nos. 134 and 137 (SAS No. 140)
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.