United States

The auditor's report: New requirements for 2017


In response to the SEC’s order approving Public Company Accounting Oversight Board (PCAOB) Release 2017-001, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and Related Amendments to PCAOB Standards, the Center for Audit Quality (CAQ) recently issued Alert #2017-06, The Auditor’s Report – New Requirements for 2017.

The new standard requires auditors to provide additional information in their reports on audits of financial statements, and is to be implemented in two phases. The first implementation phase, which is effective for audits of fiscal years ending on or after December 15, 2017, includes requirements to provide information about auditor tenure (i.e., a statement disclosing the year in which the auditor began serving consecutively as the company's auditor), and other changes to the auditor’s report.

As a result of the new requirement to disclose auditor tenure, the CAQ Alert encourages auditors to begin to collect the information needed to determine auditor tenure. The Alert also suggests that audit committees may want to consider adding or expanding disclosure related to their external auditor selection and retention processes, including consideration of auditor tenure, in the proxy statement to provide context.

Other auditor reporting changes required as part of the first phase of implementation of the new standard include the following, which should be discussed with audit committee members to help them understand what to expect:

  • Adding a statement that the auditor is required to be independent
  • Addressing the report to the company’s shareholders and board of directors or equivalents
  • Some changes to the format of and verbiage used in the standard auditor’s report (e.g., the auditor’s role has been clarified, the auditor’s opinion is now the first section of the report and headings have been added to the various report sections)

The second phase of implementation requires communication of critical audit matters (CAMs), which is considered the most significant change required by the new auditing standard. A CAM is defined as a matter that was communicated or required to be communicated to the audit committee and that (a) relates to accounts or disclosures that are material to the financial statements and (b) involved especially challenging, subjective or complex auditor judgment. When determining whether a matter involved especially challenging, subjective or complex auditor judgment, the auditor takes into account certain factors, including the auditor's assessment of the risks of material misstatement.

Provisions related to CAMs will be effective for audits of fiscal years ending on or after:

  • June 30, 2019 for large accelerated filers
  • December 15, 2020 for all other companies to which the requirements apply (Communication of CAMs is not required for audits of brokers and dealers; investment companies other than business development companies; employee stock purchase, savings, and similar plans; and emerging growth companies.)

For audits of companies to which the CAM disclosure requirements apply, the CAQ Alert encourages auditors, audit committee members and financial statements preparers to engage early in discussions to understand the intent of the new requirements.