Your financial statement audit’s report will look a little different in 2022. The AICPA updated the form and content requirements for financial statement auditors’ reports, effective for audit periods ending after Dec. 15, 2021. Changes clarify responsibilities during the audit, including those of your management team. Here are some key updates financial leaders will want to understand prior to their first audit with the new report.
Wait, This Sounds Familiar
If financial statement auditor form and content changes sound vaguely familiar, it’s because they were originally scheduled to affect 2020 audits. The effective date of SAS No. 134 was delayed, as were many other regulatory updates as a result of the COVID-19 pandemic. Your management team can generally expect to see the new format for audit reports released in 2022, assuming you follow a calendar year-end.
What are Financial Statement Users Takeaways Again?
The biggest changes in auditing standards updates affect your financial statement audit team. Because SAS No. 134 affects how the audit report reads, however, financial leaders will want to be aware of these modifications:
1) Emphasis on the Auditor’s Opinion and Independence
In the new report format, the auditor’s opinion will be front and center, followed by the basis of the auditor’s opinion. Placing the auditor’s opinion in the first paragraph of the report is designed to help readers of your financial statements better understand the results of the audit – particularly whether it was a “clean” opinion. Financial statement audit opinions that are not clean will have a qualified, adverse, or disclaimer of opinion.
Language in the Auditor’s Opinion section emphasizes the responsibilities of the auditor in issuing that opinion, namely that the auditor must be independent of the entity being audited. While auditor independence is part of auditing ethical standards, including that language in the report clarifies the adherence to that standard. SAS No. 134 also requires a paragraph that explains the basis for the auditor’s opinion.
2) Private Companies Get a Taste of Significant Audit Areas Insights
The Public Company Accounting Oversight Board (PCAOB) has already required public companies to receive information on Critical Audit Matters (CAMs) that are identified by the auditor during the financial statement audit.
SAS No. 134 opens the door for private companies to also receive a report out on areas of focus or Key Audit Matters (KAMs) if the private company so chooses. Private companies will be able to decide if they wish to engage their auditor to include KAMs in the audit report. If they do, the audit report will describe, in the judgment of the auditor, the areas that the auditor found to be of most significance in the financial statement audit.
If elected, the KAMs report would be included in the auditor’s report after the basis of opinion paragraph. KAMs will require more documentation and audit time, as the auditor will have to evaluate and document why these areas were selected and how they were addressed in the audit. Areas of reporting ripe for KAM-treatment include the evaluation of asset impairment, going concern issues, and other matters that require significant auditor judgements.
It’s important to keep in mind that your KAMs should not be boilerplate, rather they should be specific to your organization’s unique situation. Auditors that have been tasked with reports on KAMs also cannot use the Emphasis-of-Matter section to fulfill that request; the KAM must be cleanly marked in the audit report with a KAMs header.
For organizations that do not elect KAMs, the Emphasis-of-Matter section will be the same, it will just appear in a different spot in the auditor’s report. The new auditor’s report format puts Emphasis-of-Matter following the paragraph on the basis of an auditor’s opinion.
3) Management and Auditor Responsibilities Clearly Defined
SAS No. 134 expands on the last two paragraphs of the audit report involving the responsibilities of management and responsibilities of the auditor.
The report will clearly state it is the management’s responsibility to prepare and present the organization’s financial statements in accordance with applicable financial reporting framework, and to maintain an internal control environment that is free from material misstatement. It also will clarify that if applicable, it is the management’s responsibility to evaluate whether the organization is at a risk for going concern. Keep in mind that the ability of your organization to continue as a going concern may have become a focal point during the pandemic. Several factors underlie going concern discussions in 2022 audits, from the 2017 accounting changes that affect the analysis of your organization’s ability to continue as a going concern to the widespread triggering events experienced in 2020 (and for some entities, even 2021).
Auditor responsibilities are also clearly spelled out in the new format. The report states the auditor’s objectives are to obtain reasonable assurance (defined as a high level but not absolute assurance) about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion.
Further details on the auditor’s responsibilities during the audit are provided along with clear statements that auditor responsibilities include communication with those charged with governance about scope, timing, significant findings, internal control, and other matters uncovered during the audit.
If the auditor has substantial doubt about your ability to continue as a going concern, the auditor will list this in the Emphasis-of-Matter section.
Preparing for Financial Statement Audits under SAS No. 134
Your auditor should be communicating to you how the changes in the form and content of the audit report will affect your financial statement audit engagement at large. You may ask for a sample of a report prepared under the new standard to fully conceptualize how reports under SAS No. 134 will be different from prior reports.
If your organization is considering the KAM election, you will also want to discuss what to expect from the KAMs reporting, including the additional costs involved.
For more information, please contact a member of our team.