In May 2019, the AICPA’s Auditing Standards Board issued Statement on Auditing Standards (SAS) 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements. SAS 134 is effective for audits for periods ending on or after December 15, 2021. The primary objective of SAS 134 is to improve audit transparency while enhancing the value of the audit reports for financial statement audits. The following key provisions will have major effects on auditor reports for 2021 and beyond.
Format of the Auditor’s Report
With the adoption of this standard, the format of the report will change. Traditionally, the Auditor’s Opinion was presented towards the end of the report. Going forward, the report will begin with the Auditor’s Opinion, which most view as the section of the report with the greatest value.
Following the Auditor’s Opinion section, will be the Basis for Opinion section, which will now be required in all reports. Historically, the Basis for Opinion section was only required in reports with modified opinions. The Basis for Opinion section will include the following items:
- The auditor’s requirement to be independent of the entity and to meet other ethical standards
- Reference to the section of the report describing the auditor’s responsibilities under generally accepted accounting standards (GAAS)
- A statement that the audit was conducted in accordance with GAAS in the United States
- A statement regarding whether the auditor believes the audit evidence obtained during the audit is sufficient and appropriate to provide a basis for the auditor’s opinion
Key Audit Matters (KAMs)
Under SAS 134, a new auditing standard was developed under AU-C Section 701, Communicating Key Audit Matters in the Independent Auditor’s Report (Section 701). Section 701 addresses the auditor’s responsibility to communicate KAMs in the report if and when the auditor is engaged to do so. The purpose of communicating KAMs is to provide greater transparency about the audit to the financial statement’s external users.
The new standard provides that it is the auditor’s judgment in determining the KAMs that were of most significance in the audit of the financial statements of the current period. These are generally areas with a higher risk of material misstatement, areas of the financial statements that involve significant judgment, or significant transactions or events that occurred during the current year under audit.
For each KAM identified in the report, the following items will be addressed: (1) a description of the primary reason(s) the item was designated a KAM, (2) how it was addressed in the audit, and (3) a reference to the financial statement account(s) or disclosure(s).
To reiterate, KAMs are optional. An entity may elect to engage its auditor to communicate KAMs in the report. Behind the additional language added to the report is a significant amount of additional work performed by the audit team in properly identifying, assessing, and communicating KAMs. Additionally, the communication of KAMs do not alter the opinion on the financial statements.
Under SAS 134, the Management’s Responsibility for the Financial Statements section of the report requires a statement regarding the entity’s evaluation of going concern. The following statement will be included in all reports: “Management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern…” Historically, the topic of “going concern” was only included in reports for entities that had going concern issues.
In addition, if the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern, this fact is now required to be stated in a separate section of the report titled “Substantial Doubt about the Entity’s Ability to Continue as a Going Concern”.
Lastly, there will be expanded descriptions required to be reported under the Management Responsibilities and Auditor’s Responsibilities sections of the report. These are items that have always been a part of GAAS; however, are now required to be included as additional information in the report.
The Anderson ZurMuehlen Team is proud to be a resource to you. If you have questions regarding the new auditor reporting standard, please contact us.
This article was written by Jordan Wilson, CPA, and Manager in our Billings office location.