Industry Updates: Recent changes in SAS 134-141 New Auditor Reporting Standard (Part 1)

COVID-19’s effects have rippled through every aspect of our lives. Auditing standards are no exception. There
have been several significant changes or developments in auditing standards. If you utilize audited financial statements, you should be advised that the auditor’s reports for the 2021 calendar year-end audits will have a new look. One of the recent changes is the SAS 134-141 New Auditor Reporting Standards. This article will provide an overview of SAS No. 134; future articles will address SAS 135 – 141. 
SAS 134 focuses on the changes that significantly influence the structure and content of the auditor’s report. This article aims to help our clients, companies, and financial statement users to be prepared for the upcoming audit reports and also to avoid any surprises.

Overview of Changes to Audit Reports

“In May 2019, the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements
(AU-C section 701), which significantly revised the form and content of auditor’s reports on the financial statements of nonpublic entities.”

Here are the most significant changes in the New Audit Report Standards (https://www.barnesdennig.com/audit-report-changes-sas-134/):

       The opinion section is required to be presented first, followed by the Basis for Opinion section.

The intent is to highlight the opinion by making it more prominent in the report.

       The Basis for Opinion section includes a statement that the auditor is required to be independent of the entity and to meet the auditor’s other ethical responsibilities.

       Enhanced auditor reporting relating to going concern, including a description of the respective responsibilities of management when required by the applicable financial reporting framework, and the auditor for going concerned.

       Expanded description of the auditor’s responsibilities, including the auditor’s responsibilities relating to professional judgment and professional skepticism, and the auditor’s communications with those charged with governance.

       Provides an option to report key audit matters (KAMs)

 

Key Audit Matters (KAMs)

 

SAS 134 does NOT require the reporting of KAMs in the auditor’s report but provides an option for these
to be included. KAMs are those matters that, in the auditor’s professional judgment, were of most significance in the audit of financial statements of the current period. KAMs are generally selected from matters communicated with those charged with governance. The decision to include KAMs in the auditor’s report is at the option of the management. We expect very few nonpublic business entities will request to have KAMs reported, as they would prefer to keep those qualitative matters out of the audit report that may be shared externally.

 

Going Concern

 
SAS 134 now requires a statement in the Responsibilities of Management section on the evaluation of conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. This is a significant change because all reports will now include language about going concern, where previously it was only required if there was substantial doubt. It is important for users to understand that the reference to going concern does not automatically indicate that substantial doubt exists, and the reports should be read carefully. We recommend having discussions with users of your financial statements to make sure they are aware of the changes coming to the audit report.

SAS No. 134’s New AU-C 706A: Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report

A. Objective of AU-C706A

The objective of AU-C 706A is to draw users’ attention to the auditor’s report on the following:

1.      A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements (emphasis-of matter paragraph), and

2.      Any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report (other-matter paragraph).

B. Scope of AU-C 706A

SAS No. 134’s new AU-C 705A replaces the previously AU-C 705 issued as part of SAS No. 122, and has the following scope:

1.      New AU-C 705A addresses the auditor’s responsibility to issue an auditor’s report in circumstances in which the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary.

2.      It applies when an auditor is forming an opinion in accordance with:

a.      SAS No. 134’s new AU-C 700A, Forming an Opinion and Reporting on Financial Statements, or

b.      SAS No. 136, AU-C 703, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA.

3.      In addition, the new AU-C 705A deals with how the form and content of the auditor’s
the report is affected when the auditor expresses a modified opinion.

SAS No. 134’s New AU-C 706A: Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report

 A.     Objective of AU-C 706A 

The objective of AU-C 706A is to draw users’ attention to the auditor’s report on the following:

1. A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements (emphasis-of matter paragraph), and

2. Any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report (other-matter paragraph).

B. Scope of AU-C 706A

 1. SAS No. 134’s new AU-C 706A addresses additional communications in the auditor’s report when the auditor considers it necessary to draw attention to: 

a. Matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements (emphasis-of-matter paragraph), or 

b. Matters other than those presented or disclosed in the financial statements, that are relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report (another matter paragraph).

2. When the auditor is engaged to communicate key audit matters, AU-C 706A addresses the relationship between key audit matters per AU-C 701 and any additional communication in the auditor’s report in accordance with this AU-C 706A.

3. AU-C 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, addresses communication in the auditor’s report relating to going concerned.

We’re Here to Help

While the overall changes are significant and may take some time for everyone to adjust, this article aims to help financial statement users comprehend the audit results and the auditor’s and management’s responsibilities. Please reach out to HWA Alliance of CPA Firms if you have any questions regarding adopting the new auditor reporting standards. Contact us, and one of our accounting professionals will assist you in evaluating any changes to your audit reporting process. We’re here to help.

 

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