If you have audited financial statements, you should be aware that the accompanying auditor’s report is soon going to have a new look under a new audit standard. This new standard will significantly change the form and content of the auditor’s report. Some of the main changes include revisions to the layout of the report, new requirements for the “Basis of Opinion” paragraph, expanded statements regarding responsibilities for management and the auditor, as well as other additional communications depending on circumstances. This standard is effective for audits of financial statements for periods ending on or after December 15, 2021, with early implementation allowed. Previously, this was going to be effective for calendar 2020 year-ends but was deferred earlier this year in response to COVID. However, early implementation was allowed as part of the deferral, so some firms may decide to implement this change for upcoming client year-ends.
Upon implementation, the layout of the auditor’s report will begin with the “Opinion” paragraph followed by the “Basis for Opinion” paragraph. The “Basis of Opinion” is now required for all reports (not just those with modified opinions) and will:
- Indicate that the audit was conducted in accordance with generally accepted auditing standards (GAAS) and identify the United States as the country of origin of those standards.
- Refer to the section of the auditor’s report that describes the auditor’s responsibilities under GAAS.
- Include a statement that the auditor is required to be independent of the entity and to meet other ethical responsibility requirements.
- Indicate whether the auditor believes the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
The “Responsibilities of Management for the Financial Statements” will be updated to include that management is responsible for evaluating the organization’s ability to continue as a going concern. Further, if the financial statements do not include adequate disclosure about an entity’s ability to continue as a going concern for a reasonable period, new requirements for the auditor include indicating in the “Basis for Qualified (Adverse) Opinion” section that:
- Substantial doubt exists about the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter; or
- Substantial doubt exists about the entity’s ability to continue as a going concern has been alleviated by management’s plans, but the financial statements do not adequately disclose this matter
The “Auditor’s Responsibility” section will be expanded including, among other things, the auditor’s responsibilities relating to professional judgment and professional skepticism, the auditor’s communications with those charged with governance, and the auditor’s responsibility for going concern.
Further, there will now be an option to communicate key audit matters (KAMs) in the auditor’s report. This is not required unless the auditor is engaged to communicate KAMs. If the auditor is engaged to communicate this, it would discuss matters that, in the auditor’s professional judgement, were most significant in the audit of the financial statements.
While your auditor will help facilitate this change, you should be aware of these updates so that you can brief users of the financial statements on these modifications that are coming. At Henry+Horne, we have decided that we will not early implement this audit standard, so you will not see these changes until 2021-year end.
If you have an accounting question, don’t hesitate to contact a Henry+Horne professional adviser.
Michael Guido, CPA