The New Auditor’s Report: Changes You Should Expect in 2022
By Joshua Bloom, Senior Manager, Assurance Services
Private companies, not-for-profit organizations, and governmental entities that end their fiscal year on or after December 15, 2021 (calendar year 2021), are going to notice that their audit report looks significantly different this year. Public companies are not affected by this standard.
Reasons for the Changes
The AICPA’s Auditing Standards Board issued Statements on Auditing Standards (SAS) 134-141, which completely overhaul the auditor’s report. The new standards are intended to make it easier for users of financial statements to understand the report, including the auditor’s responsibilities and management’s responsibilities. The standards also converge the reports to look more like those issued under standards promulgated by the International Auditing and Assurance Standards Board (IAASB) standards and to be more consistent with the revised auditor reporting model supported by the Public Company Accounting Oversight Board (PCAOB).
Summary of the Changes of the Unqualified Auditor’s Report
The new report begins with the part the users of financial statements care about most: the auditor’s opinion. Previously at the end of the report, our opinion and what we audited are highlighted in the new format. If we are qualifying our opinion or issuing a disclaimer of opinion, it is explained here. Consider the example below:
To the Board of Directors
ABC Company, Inc.
We have audited the financial statements of ABC Company, Inc., which comprise the balance sheet as of December 31, 2020, 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 accompanying financial statements present fairly, in all material respects, the financial position of ABC Company, Inc. as of December 31, 2020, 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.
The second section of the auditor’s report states that we performed our audit in accordance with auditing standards generally accepted in the United States of America. While we have always been required to be independent, there is new language that explicitly highlights that we are required to be independent of the company being audited and that we meet other ethical responsibilities.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of ABC Company, Inc. 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.
The third section is a discussion of management’s responsibilities for the financial statements, and largely mirrors the language in the previous version of the audit report. The biggest change here is that explicitly states that management is required to evaluate the company’s ability to continue as a going concern for one year after the date the financial statements are available (e.g., if we issue our opinion on February 15, 2022, following a December 31, 2021 year-end, then management must perform an assessment through February 15, 2023), though this been required for several years now. Managers of government entities are responsible for evaluating whether there is substantial doubt about the government’s ability to continue as a going concern for 12 months beyond the financial statement date, though the continuation of a governmental entity as a going concern is assumed in the absence of significant information to the contrary.
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, Inc.’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
The fourth section is a discussion of our responsibilities for the financial statements. The new statements expand on what it means to obtain “reasonable assurance” about whether the financial statements are free from material misstatement, whether due to fraud or error. Another change is that auditors must list, in a bullet point format, our responsibilities in performing an audit — including our responsibility to conclude whether there are conditions or events that, when considered in the aggregate, raise substantial doubt about the company’s ability to continue as a going concern.
Finally, auditors add a new paragraph at the end of the report noting that we are required to communicate with those charged with governance (often company owners or the board of directors) about certain items, like the planned scope and timing of the audit. This communication has always been required under auditing standards, but has never been explicitly mentioned in our report.
Auditors’ 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 auditors’ 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 GAAS 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, including omissions, 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 GAAS, 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, Inc.’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, Inc.’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.
Other Changes under the Standards
There are other changes as a result of SAS 134-141:
- The definition of materiality has changed: “Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment of a reasonable user based on the financial statements.”
- Increased focus on “qualitatively” material disclosures, including those relating to liquidity or debt covenants; impairment loss events and circumstances; key sources of estimation uncertainty as they relate to contingencies; accounting policy changes; share-based payment arrangements; and related party disclosures.
- Our audit reports for employee benefit plans will be updated. In addition, what were previously known as “limited-scope audits” will now be referred to as ERISA Section 103(a)(3)(C) audits.
- We are also expecting changes as they relate to compliance audit reports under Government Auditing Standards (yellow book) and under the Uniform Guidance.
There are other changes discussed in the auditing standards, but based on our existing audit methodologies we do not expect many of our audit clients to notice a significant difference.