PCAOB Adopts Auditing Standard on Communications with Audit Committees | Practical Law

PCAOB Adopts Auditing Standard on Communications with Audit Committees | Practical Law

The Public Company Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 16, on communications between auditors and audit committees of boards of directors of public companies.

PCAOB Adopts Auditing Standard on Communications with Audit Committees

Practical Law Legal Update 7-520-9487 (Approx. 4 pages)

PCAOB Adopts Auditing Standard on Communications with Audit Committees

by PLC Corporate & Securities
Published on 16 Aug 2012 • USA (National/Federal)
The Public Company Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 16, on communications between auditors and audit committees of boards of directors of public companies.
On August 15, 2012, the Public Company Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 16, Communications with Audit Committees. The new standard seeks to improve the audit by enhancing the relevance and effectiveness of communications between outside auditors and audit committees.
The standard was originally proposed on March 29, 2010 and then reproposed for comment on December 20, 2011 (see Legal Updates, PCAOB Releases Proposed Auditing Standard on Communications with Audit Committees and PCAOB Reproposes Auditing Standards on Communications With Audit Committees).
The adopted standard will supersede PCAOB interim standards AU sec. 380, Communication with Audit Committees, and AU sec. 310, Appointment of the Independent Auditor and amend certain other interim standards.

Communications between the Auditors and the Audit Committee

Among other things, the adopted new standard requires the auditor to:
  • Communicate with the audit committee to establish an understanding of the terms of the audit engagement, including:
    • the objective of the audit;
    • the responsibilities of the auditor; and
    • the responsibilities of management.
    The auditor must document the terms in an engagement letter, which must be acknowledged and agreed to by the audit committee and executed on behalf of the company.
  • Obtain information from the audit committee that is relevant to the audit, including whether the committee is aware of any violations or possible violations of laws or regulations.
  • Communicate to the audit committee an overview of the audit strategy, including the timing of the audit, the roles, responsibilities and location of firms participating in the audit and any planned use of the internal audit function in auditing the company's internal control over financial reporting, and discuss with the committee any significant risks identified by the auditor.
  • Communicate with the audit committee regarding matters that arise during the audit, including:
    • matters relating to the company's critical accounting policies, practices and estimates;
    • significant unusual transactions not in the ordinary course of business or that otherwise appear to be unusual and the auditor's understanding of the business rationale for those transactions;
    • the auditor's evaluation of the quality of the company's financial reporting;
    • the auditor's evaluation of the company's ability to continue as a going concern; and
    • any difficulties the auditor encountered during the audit, such as significant delays by management or unreasonably brief time to complete the audit.
All of the communications required under this auditing standard must occur before the auditor issues its audit report.
Auditing Standard No. 16 does not preclude the auditor from providing additional information to the audit committee nor from responding to audit committee requests for additional information.
Section 982 of the Dodd-Frank Act gave the PCAOB oversight of the audits of SEC-registered brokers and dealers. If the SEC adopts proposed rule amendments relating to the audit and attestation requirements for brokers and dealers, Auditing Standard 16 will apply to the audits of brokers and dealers as well.

JOBS Act Impact

Under Section 104 of the JOBS Act, any rules adopted by the PCAOB after April 5, 2012 do not apply to the audits of emerging growth companies (EGCs) unless the SEC determines the new rules are necessary to protect the public.
This is the first set of rules adopted by the PCAOB since the JOBS Act and will not apply to EGCs unless the SEC determines otherwise. In filing Auditing Standard No. 16 for approval by the SEC, the PCAOB is also requesting that the SEC approve application of the new standard to the audits of EGCs.

Effective Date

Auditing Standard No. 16 is anticipated to be effective, subject to SEC approval, for audits of fiscal years beginning on or after December 15, 2012.