There will be significant changes to audit reports that entities and users should be aware of to avoid surprises and conclusions as audit reports are issued in the upcoming year. Understanding the changes will allow you to better evaluate the results of the audit, and what is being communicated by the auditor.

What is causing the change?

In May 2019, the Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 134 Auditor Reporting and Amendments, including Amendments Addressing Disclosures in the Audit of Financial Statements.

SAS 134 makes significant changes to the content and layout of the audit report. It is intended to assist users of audited financial statements with added visibility and transparency. This new standard is effective for audits of financial statements for periods ending on or after December 15, 2021. The changes result in a longer report than what would have been issued in prior years, which is primarily driven by increased descriptions of the auditor’s responsibilities. This was identified as an area where there was a gap between the auditor’s responsibilities per the auditing standards and what users expected the auditor’s responsibilities were.

SAS 134 makes the following key changes:

  • Opinion section 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 concern
  • 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

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 management. We expect very few non-public 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. For reference, below we have included an example of a template audit report with the changes identified. The example does not reflect all possible report modifications or emphasis of a matter disclosures, and is for illustration purposes, your audit report may differ from the below.

We’re Here to Help

Please reach out to us if you have any questions on how SAS 134 will impact your audit report. Contact us, and one of our accounting professionals can help you assess any changes to your audit reporting process. We’re here to help.

Example: Independent Auditors Report

NOTE: all italicized font represents changes from the previous reports.

To the Board of Directors and Stockholders of ABC Company

Opinion [Moved to beginning of report]

We have audited the accompanying financial statements of ABC Company (a Ohio corporation), which comprise the balance sheet as of December 31, 20X1, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion [Moved to immediately follow the Opinion section]

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of ABC Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable 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 our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with generally accepted auditing standards, we:

    • Exercise professional judgment and maintain professional skepticism throughout the audit.
    • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
    • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of ABC Company’s internal control. Accordingly, no such opinion is expressed.
    • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
    • Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about ABC Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

Firm’s signature

City, State Where Auditor’s Report Is Issued

February 15, 20X2

 

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