In brief: PCAOB adopts Auditing Standard related to audit committee communications (No. 2012-35)

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On August 15, the PCAOB adopted Auditing Standard No. 16, Communications with Audit Committees (AS 16). The standard establishes requirements that enhance the relevance and quality of the communications between the auditor and the audit committee, and is intended to foster constructive dialogue between the two on significant audit and financial statement matters. The enhanced communications may benefit audit committees in their oversight responsibilities and auditors in conducting effective audits. The standard and related amendments, if approved by the SEC, will be effective for public company audits of fiscal periods beginning after December 15, 2012. Also, audits of brokers and dealers will be subject to the PCAOB audit committee communication requirements if the SEC approves the use of PCAOB auditing standards for audits of such entities.

What's new?

On August 15, 2012, the Public Company Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 16, Communications with Audit Committees . The standard establishes requirements that enhance the relevance and quality of the communications between the auditor and the audit committee, and is intended to foster constructive dialogue between the two on significant audit and financial statement matters. The enhanced communications may benefit audit committees in their oversight responsibilities and auditors in conducting effective audits.

What are the key provisions?

Auditing Standard No. 16 retains or enhances communication requirements that exist in the PCAOB's interim standards or the SEC's communication requirements and adds new communication requirements that are generally linked to performance requirements in other PCAOB standards. Among these enhancements are:

• Certain matters regarding the company's accounting policies, practices and estimates including, but not limited to, a description of processes and assumptions management used in critical estimates;
• The auditor's evaluation of the quality of the company's financial reporting;
• Information related to significant unusual transactions including the business rationale for such transactions; and
• The auditor's views regarding significant accounting or auditing matters when the auditor is aware that management consulted with other accountants about such matters and the auditor has identified a concern regarding these matters.

While existing practice or the requirements of other regulatory bodies have evolved to include communications with the audit committee beyond those required by the previous standards, the new standard incorporates these communications and provides the audit committee with additional information about significant aspects of the audit.

Many of these communications are linked to the results of audit procedures or the conduct of the audit and include:

• An overview of the overall audit strategy, including timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks;
• Information about the nature and extent of specialized skill or knowledge needed in the audit, the extent of the planned use of internal auditors, company personnel or other third parties, and other independent public accounting firms, or other persons not employed by the auditor that are involved in the audit;
• The basis for the auditor's determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors;
• Situations in which the auditor identified a concern regarding management's anticipated application of accounting pronouncements that have been issued but are not yet effective and might have a significant effect on future financial reporting;
• Difficult or contentious matters for which the auditor consulted outside the engagement team;
• The auditor's evaluation of going concern;
• Departures from the auditor's standard report; and
• Other matters arising from the audit that are significant to the oversight of the company's financial reporting process.

What's the effective date?

The standard and related amendments, if approved by the SEC, will be effective for public company audits of fiscal periods beginning after December 15, 2012.

Audits of brokers and dealers will be subject to PCAOB audit committee communication requirements if the SEC approves the use of PCAOB auditing standards for audits of such entities.

What's next?

The adopted standard and amendments will become finalized upon approval by the SEC.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the National Professional Services Group (1-973-236-7800).

Authored by:

Tom Gaidimas
Partner
Phone: 1-973-236-5036
Email: thomas.gaidimis@us.pwc.com

Marc Panucci
Partner
Phone: 1-973-236-4885
Email: marc.a.panucci@us.pwc.com

Patrick O'Donnell
Senior Manager
Phone: 1-973-236-4870
Email: patrick.m.odonnell@us.pwc.com

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