Source: https://pcaobus.org/Standards/Auditing/Pages/AS1301.aspx
Timestamp: 2019-04-24 17:54:58+00:00

Document:
.01 This standard requires the auditor to communicate with the company's audit committee1 regarding certain matters related to the conduct of an audit2 and to obtain certain information from the audit committee relevant to the audit. This standard also requires the auditor to establish an understanding of the terms of the audit engagement with the audit committee and to record that understanding in an engagement letter.
.02 Other Public Company Accounting Oversight Board ("PCAOB") rules and standards identify additional matters to be communicated to a company's audit committee (see Appendix B). Various laws or regulations also require the auditor to communicate certain matters to the audit committee.3 The communication requirements of this standard do not modify or replace communications to the audit committee required by such other PCAOB rules and standards, and other laws or regulations. Nothing in this standard precludes the auditor from communicating other matters to the audit committee.
Provide the audit committee with timely observations arising from the audit that are significant to the financial reporting process.
Note: "Communicate to," as used in this standard, is meant to encourage effective two-way communication between the auditor and the audit committee throughout the audit to assist in understanding matters relevant to the audit.
.04 The auditor should discuss with the audit committee any significant issues that the auditor discussed with management in connection with the appointment or retention of the auditor, including significant discussions regarding the application of accounting principles and auditing standards.
.06 The auditor should record the understanding of the terms of the audit engagement in an engagement letter and provide the engagement letter to the audit committee annually. The auditor should have the engagement letter executed by the appropriate party or parties on behalf of the company.4 If the appropriate party or parties are other than the audit committee, or its chair on behalf of the audit committee, the auditor should determine that the audit committee has acknowledged and agreed to the terms of the engagement.
Note: Appendix C describes matters that the auditor should include in the engagement letter about the terms of the audit engagement.
.07 If the auditor cannot establish an understanding of the terms of the audit engagement with the audit committee, the auditor should decline to accept, continue, or perform the engagement.
Note: This overview is intended to provide information about the audit, but not specific details that would compromise the effectiveness of the audit procedures.
Note: The term "other independent public accounting firms" in the context of this communication includes firms that perform audit procedures in the current period audit regardless of whether they otherwise have any relationship with the auditor.
(2) The effect on financial statements or disclosures of significant accounting policies in (i) controversial areas or (ii) areas for which there is a lack of authoritative guidance or consensus, or diversity in practice.
(2) How current and anticipated future events might affect the determination of whether certain policies and practices are considered critical.
Note: Critical accounting policies and practices, as defined in Appendix A, are a company's accounting policies and practices that are both most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Critical accounting policies and practices are tailored to specific events in the current year, and the accounting policies and practices that are considered critical might change from year to year.
(2) The policies and practices management used to account for significant unusual transactions.
Note: As part of its communications to the audit committee, management might communicate some or all of the matters in paragraph .12. If management communicates any of these matters, the auditor does not need to communicate them at the same level of detail as management, as long as the auditor (1) participated in management's discussion with the audit committee, (2) affirmatively confirmed to the audit committee that management has adequately communicated these matters, and (3) with respect to critical accounting policies and practices, identified for the audit committee those accounting policies and practices that the auditor considers critical. The auditor should communicate any omitted or inadequately described matters to the audit committee.
Qualitative aspects of significant accounting policies and practices.
Assessment of critical accounting policies and practices. The auditor's assessment of management's disclosures related to the critical accounting policies and practices, along with any significant modifications to the disclosure of those policies and practices proposed by the auditor that management did not make.
New accounting pronouncements. Situations in which, as a result of the auditor's procedures, 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.
.15 The auditor should communicate to the audit committee matters that are difficult or contentious for which the auditor consulted outside the engagement team and that the auditor reasonably determined are relevant to the audit committee's oversight of the financial reporting process.
.16 When the auditor is aware that management consulted with other accountants about significant auditing or accounting matters and the auditor has identified a concern regarding such matters, the auditor should communicate to the audit committee his or her views about such matters that were the subject of such consultation.
.18 The auditor should provide the audit committee with the schedule of uncorrected misstatements related to accounts and disclosures34 that the auditor presented to management.35 The auditor should discuss with the audit committee, or determine that management has adequately discussed with the audit committee, the basis for the determination that the uncorrected misstatements were immaterial, including the qualitative factors36 considered. The auditor also should communicate that uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even if the auditor has concluded that the uncorrected misstatements are immaterial to the financial statements under audit.
.19 The auditor should communicate to the audit committee those corrected misstatements, other than those that are clearly trivial,37 related to accounts and disclosures that might not have been detected except through the auditing procedures performed, and discuss with the audit committee the implications that such corrected misstatements might have on the company's financial reporting process.
.21 The auditor should provide to and discuss with the audit committee a draft of the auditor's report.
.22 The auditor should communicate to the audit committee any disagreements with management about matters, whether or not satisfactorily resolved, that individually or in the aggregate could be significant to the company's financial statements or the auditor's report. Disagreements with management do not include differences of opinion based on incomplete facts or preliminary information that are later resolved by the auditor obtaining additional relevant facts or information prior to the issuance of the auditor's report.
Management's unwillingness to make or extend its assessment of the company's ability to continue as a going concern when requested by the auditor.
Note: Difficulties encountered by the auditor during the audit could represent a scope limitation,39 which may result in the auditor modifying the auditor's opinion or withdrawing from the engagement.
Note: If, as part of its communications to the audit committee, management communicated some or all of the matters identified in paragraphs .12 or .18 and, as a result, the auditor did not communicate these matters at the same level of detail as management, the auditor must include a copy of or a summary of management's communications provided to the audit committee in the audit documentation.
.26 All audit committee communications required by this standard should be made in a timely manner and prior to the issuance of the auditor's report.43 The appropriate timing of a particular communication to the audit committee depends on factors such as the significance of the matters to be communicated and corrective or follow-up action needed, unless other timing requirements are specified by PCAOB rules or standards or the securities laws.
Note: An auditor may communicate to only the audit committee chair if done in order to communicate matters in a timely manner during the audit. The auditor, however, should communicate such matters to the audit committee prior to the issuance of the auditor's report.
.A2 Audit committee - A committee (or equivalent body) established by and among the board of directors of a company for the purpose of overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company; if no such committee exists with respect to the company, the entire board of directors of the company.
For audits of nonissuers, if no such committee or board of directors (or equivalent body) exists with respect to the company, the person(s) who oversee the accounting and financial reporting processes of the company and audits of the financial statements of the company.
.A3 Critical accounting estimate - An accounting estimate where (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
.A4 Critical accounting policies and practices - A company's accounting policies and practices that are both most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
This appendix identifies other PCAOB rules and standards related to the audit that require communication of specific matters between the auditor and the audit committee.
.C1 The auditor should include the following matters in the engagement letter.1 The auditor's description of these matters will vary depending on whether the auditor is engaged in a financial statement audit or in an audit of internal control over financial reporting that is integrated with an audit of financial statements ("integrated audit").
Integrated audit: The expression of an opinion on both the effectiveness of internal control over financial reporting and the financial statements.
Audit of financial statements: The expression of an opinion on the financial statements.
Integrated audit: Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Accordingly, there is some risk that a material misstatement of the financial statements or a material weakness in internal control over financial reporting would remain undetected. Although not absolute assurance, reasonable assurance is a high level of assurance. Also, an integrated audit is not designed to detect error or fraud that is immaterial to the financial statements or deficiencies in internal control over financial reporting that, individually or in combination, are less severe than a material weakness. If, for any reason, the auditor is unable to complete the audit or is unable to form or has not formed an opinion, he or she may decline to express an opinion or decline to issue a report as a result of the engagement.
Audit of financial statements: Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, there is some risk that a material misstatement would remain undetected. Although not absolute assurance, reasonable assurance is a high level of assurance. Also, a financial statement audit is not designed to detect error or fraud that is immaterial to the financial statements. If, for any reason, the auditor is unable to complete the audit or is unable to form or has not formed an opinion, he or she may decline to express an opinion or decline to issue a report as a result of the engagement.
To the audit committee and management: all material weaknesses in internal control over financial reporting identified during the audit, in writing.
To the audit committee: all significant deficiencies identified during the audit, in writing, and informs the audit committee when the auditor has informed management of all internal control deficiencies.
To management: all internal control deficiencies identified during the audit and not previously communicated in writing by the auditor or by others, including internal auditors or others within the company.
To the board of directors: any conclusion that the audit committee's oversight of the company's external financial reporting and internal control over financial reporting is ineffective, in writing.
To the audit committee and management: all significant deficiencies and material weaknesses identified during the audit, in writing.
To the board of directors: if the auditor becomes aware that the oversight of the company's external financial reporting and internal control over financial reporting by the audit committee is ineffective, that conclusion, in writing.
Management is responsible for the company's financial statements, including disclosures.
Management is responsible for establishing and maintaining effective internal control over financial reporting.
Management is responsible for identifying and ensuring that the company complies with the laws and regulations applicable to its activities.
Management is responsible for making all financial records and relevant information available to the auditor.
At the conclusion of the engagement, management will provide the auditor with a letter that confirms certain representations made during the audit.
Management is responsible for adjusting the financial statements to correct material misstatements relating to accounts or disclosures and for affirming to the auditor in the representation letter that the effects of any uncorrected misstatements aggregated by the auditor are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
2 For purposes of this standard, an audit is either an audit of internal control over financial reporting that is integrated with an audit of financial statements or an audit of financial statements only.
3 See e.g., Section 10A(k) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j-1(k); Rule 2-07 of Regulation S-X, 17 C.F.R. § 210.2-07; and Rule 10A-3 under the Exchange Act, 17 C.F.R. § 240.10A-3.
4 Absent evidence to the contrary, the auditor may rely on the company's identification of the appropriate party or parties to execute the engagement letter.
5 In addition to this inquiry, paragraphs .05f and .54-.57 of AS 2110, Identifying and Assessing Risks of Material Misstatement, describe the auditor's inquiries of the audit committee, or equivalent (or its chair) regarding the audit committee's knowledge of the risks of material misstatement, including fraud risks. These inquiries include, among other things, whether the audit committee is aware of tips or complaints regarding the company's financial reporting.
6 See AS 2405, Illegal Acts by Clients, for a description of the auditor's responsibilities when a possible illegal act is detected. For audits of issuers, see also Section 10A(b) of the Exchange Act, 15 U.S.C. § 78j-1(b), and Rule 10A-1 under the Exchange Act, 17 C.F.R. § 240.10A-1.
7 See paragraphs .08-.09 of AS 2101, Audit Planning, for a description of the auditor's responsibilities for establishing an overall audit strategy.
8 AS 2110 requires the auditor to determine whether identified and assessed risks are significant risks. A significant risk is defined as a risk of material misstatement that requires special audit consideration.
9 See AS 2101.16 for the requirement for the auditor to determine whether specialized skill or knowledge is needed to perform appropriate risk assessments, plan or perform audit procedures, or evaluate audit results.
10 See AS 2605, Consideration of the Internal Audit Function, which describes the auditor's responsibilities related to the work of internal auditors.
11 See paragraphs .16-.19 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, which describe the auditor's responsibilities related to using the work of others in an audit of internal control over financial reporting.
12 See AS 2101.08-.14, which discuss the auditor's responsibilities for determining the audit strategy, audit plan, and extent to which audit procedures should be performed at selected locations or business units involving multi-location engagements.
13 See AS 1205, Part of the Audit Performed by Other Independent Auditors, which discusses the professional judgments the auditor makes in deciding whether the auditor may serve as principal auditor.
14 See AS 2101.15, which discusses changes in audit strategy and the audit plan during the course of the audit.
15 See, e.g., Financial Accounting Standards Board Accounting Standards Codification, Topic 235, Notes to Financial Statements, paragraph 235-10-50-1, which requires the entity to disclose a description of all significant accounting policies as an integral part of the financial statements, and paragraph 235-10-50-3, which describes what should be disclosed.
16 See also Section 10A(k) of the Exchange Act, 15 U.S.C. § 78j-1(k), and Rule 2-07(a)(1) of Regulation S-X, 17 C.F.R. § 210.2-07(a)(1).
17 See AS 2501, Auditing Accounting Estimates, which discusses the auditor's responsibilities to obtain and evaluate sufficient appropriate audit evidence to support significant accounting estimates in an audit of financial statements.
21 See paragraphs .24-.27 of AS 2810, Evaluating Audit Results, which describe the auditor's responsibilities related to evaluating the qualitative aspects of the company's accounting practices.
23 See AS 2501, which discusses the auditor's responsibilities to obtain and evaluate sufficient appropriate audit evidence to support significant accounting estimates in an audit of financial statements.
24 See paragraph .66 of AS 2401, Consideration of Fraud in a Financial Statement Audit.
25 See AS 2810.30-.31, which describe the auditor's responsibilities related to the evaluation of whether the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. Other PCAOB standards, such as AS 2410, Related Parties, and AS 2415, Consideration of an Entity's Ability to Continue as a Going Concern, describe the auditor's responsibilities related to evaluation of specific disclosures in financial statements.
26 See also Section 10A(k) of the Exchange Act, 15 U.S.C. § 78j-1(k), and Rule 2-07(a)(2) of Regulation S-X, 17 C.F.R. § 210.2-07(a)(2).
27 See, e.g., AS 2710, Other Information in Documents Containing Audited Financial Statements. In addition to AS 2710, discussion of the auditor's consideration of other information is included in AS 2701, Auditing Supplemental Information Accompanying Audited Financial Statements, AS 2705, Required Supplementary Information, and AS 4101, Responsibilities Regarding Filings Under Federal Securities Statutes.
28 See AS 2415 for the requirements regarding an auditor's responsibility to evaluate whether there is substantial doubt about a company's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited. Additionally, AS 2415.03a-c provide the auditor with an overview of the requirements for evaluating whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time.
29 See AS 2415.06, which provides examples of such conditions and events and AS 2415.07, which discusses the auditor's procedures if the auditor believes there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time.
30 See AS 2415.08, which discusses the auditor's responsibilities related to the auditor's evaluation of management's plans.
31 See AS 2415.12, which describes the effects on the auditor's report. See also AS 2415.03c, which discusses the auditor's evaluation of factors that indicate there is substantial doubt about the company's ability to continue as a going concern.
32 See AS 2415.10, which discusses the possible effects on the financial statements and the adequacy of the related disclosure.
33 See AS 2415.12-.16, which discuss the auditor's consideration of the effects on the auditor's report when the auditor concludes that substantial doubt exists about the company's ability to continue as a going concern for a reasonable period of time.
34 Footnote 13 to paragraph .20 of AS 2810 indicates that misstatements include omission and presentation of inaccurate or incomplete disclosures.
35 See Section 13(i) of the Exchange Act, 15 U.S.C.§ 78m(i), which states, in part, that financial statements prepared in accordance with generally accepted accounting principles and filed with the Securities and Exchange Commission "shall reflect all material correcting adjustments that have been identified by a registered public accounting firm. . . ."
36 Appendix B of AS 2810 discusses the qualitative factors related to the evaluation of the materiality of uncorrected misstatements.
37 See AS 2810.10, which requires the auditor to accumulate misstatements identified during the audit, other than those that are clearly trivial.
38 See also Section 10A(k) of the Exchange Act, 15 U.S.C. § 78j-1(k) and Rule 2-07(a)(3) of Regulation S-X, 17 C.F.R. § 210.2-07 (a)(3).
39 See paragraphs .05-.15 of AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, for a discussion of scope limitations.
40 AS 2401.79-.81 and AS 2405.17 include specific communication requirements relating to fraud or illegal acts, respectively.
42 Consistent with the requirements of AS 1215, Audit Documentation, the audit documentation should be in sufficient detail to enable an experienced auditor, having no previous connection with the engagement, to understand the communications made to comply with the provisions of this standard.
43 Consistent with Rule 2-07 of Regulation S-X, 17 C.F.R. § 210.2-07, in the case of a registered investment company, audit committee communication should occur annually, and if the annual communication is not within 90 days prior to the filing of the auditor's report, the auditor should provide an update in the 90-day period prior to the filing of the auditor's report, of any changes to the previously reported information.
1 Certain matters should not be included in an engagement letter; for example, under Securities and Exchange Commission, Section 602.02.f.i. of the Codification of Financial Reporting Policies, indemnification provisions are not permissible for audits of issuers.
2 AS 1305, Communications About Control Deficiencies in an Audit of Financial Statements, provides direction on control deficiencies identified in an audit of financial statements.
3 Paragraphs .08-.09 of AS 4105, Reviews of Interim Financial Information, discuss the auditor's responsibilities related to establishing an understanding with the audit committee in connection with a review of the company's interim financial information.

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