The Auditor’s Discussion and Analysis (AD&A), the new improvement of the auditor’s reporting model

On June 21, 2011, the Public Company Accounting Oversight Board (PCAOB) issued the Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements.

As stated in the publication, the purpose of issuing this concept release is to seek public comment on potential changes to the auditor’s reporting model based on concerns of investors and other financial statement users. Auditors, as a result of the performance of required audit procedures, often have significant information regarding a company’s financial statements and the audit of such financial statement, that is not today reported in the standard auditor’s report to the financial statements users. This information might be useful to investors and other financial statement users and could lead to more efficient markets and improved allocations of capital.

The objective of this concept release is to discuss several alternatives for changing the auditor’s reporting model that could increase its transparency and relevance to financial statement users, while not compromising audit quality.

The alternatives presented in the concept release are :

• Auditor’s Discussion and Analysis (AD&A),
• Required and expanded use of emphasis paragraphs,
• Auditor assurance on other information outside the financial statements, and
• Clarification of language in the standard auditor’s report.

The above alternatives are not mutually exclusive. A revised auditor’s report could include one or a combination of these alternatives or elements of these alternatives. Additionally, there may be other alternatives to consider that this concept release does not present.

Regarding the Auditor’s Discussion and Analysis (AD&A), the concept release proposes that a revised auditor’s reporting model could include a supplemental narrative report, which some have described as an Auditor’s Discussion and Analysis (AD&A). An AD&A could provide investors and other financial statement users with a view of the audit and the financial statements “through the auditor’s eyes.”

Further, the concept release described that the intent of an AD&A would be to provide the auditor with the ability to discuss in a narrative format his or her views regarding significant matters. The AD&A could include information about the audit, such as audit risk identified in the audit, audit procedures and results, and auditor independence. It also could include a discussion of the auditor’s views regarding the company’s financial statements, such as management’s judgments and estimates, accounting policies and practices, and difficult or contentious issues, including “close calls.”.

Additionally, an AD&A could provide the auditor with discretion to comment on those material matters that might be in technical compliance with the applicable financial reporting framework, but in the auditor’s view, the disclosure of such matters could be enhanced to provide the investor with an improved understanding of the matters and their impact on the financial statements.

Read further the full version of the Concept Release in here : PCAOB : Concept Release.

The comment period for the concept release ends on September 30, 2011.

Read also another related article : What were the Auditors Thinking?

The new rules of Audit Confirmation Process

The Public Company Accounting Oversight Board (PCAOB) on July 13, 2010 approved the publication of a proposed auditing standard regarding Confirmation. In a statement issued with the proposed new standard, PCAOB Acting Chairman Daniel L. Goelzer said the proposal modernizes the current confirmation standard, AU Section 330, The Confirmation Process, and strengthens the confirmation requirements to better protect investors and other users of audited financial statements.

This proposed standard comprises of 36 paragraphs which provides guidance about the confirmation process in audits performed in accordance with generally accepted auditing standards.

It defines the confirmation process (see par. 04), discusses the relationship of confirmation procedures to the auditor’s assessment of audit risk (see par. 05 through 10), describes certain factors that affect the reliability of confirmations (see par. 16 through 27), provides guidance on performing alternative procedures when responses to confirmation requests are not received (see par. 31 and 32). It also provides guidance on evaluating the results of confirmation procedures as states in par. 33.

In par. 05 the standards states that in determining the audit procedures to be applied, including whether they should include confirmation procedure, the auditor uses the audit risk assessment.

In relation with the audit risk assessment (read about the concept of audit risk in here), par. 07 states that the greater the combined assessed level of inherent and control risk, the greater the assurance that the auditor needs from substantive tests related to the financial statement assertion. In this situation, the auditor might use confirmation procedures rather than or in conjunction with tests directed toward documents or parties within the entity.

While par. 06 states that confirmation is undertaken to obtain evidence from third parties about financial statement assertions made by management. In general, as states in Section 326, Evidential Matter, it is presumed that “when evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity.”

There are two types of confirmation requests : the positive and the negative form. If the auditor uses the positive form of confirmation, he or she should considering since there is a risk that recipients of a positive form of confirmation request with the information to be confirmed contained on it may sign and return the confirmation without verifying that the information is correct, blank forms may be used as one way to mitigate this risk.

When the auditor has not received replies to positive confirmation requests, he or she should apply alternative procedures to the non-responses to obtain evidence necessary to reduce audit risk to an acceptably low level. However, the omission of alternative procedures may be acceptable in several circumstances as stated in par. 31 to the standard.

The nature of alternative procedures varies according to the account and assertion in question. In the examination of account receivable, for example, the auditor may conduct the examination of subsequent cash receipts, shipping documents, or other client documentation to provide evidence for the existence assertion.

The complete proposed standard and another related materials are downloadable in here

Comments for the proposed auditing standard are due on September 13, 2010.

PCAOB Issues Staff Audit Practice Alert on Auditor Considerations of Significant Unusual Transactions

On April 7, 2010, The Public Company Accounting Oversight Board  issued a Staff Audit Practice Alert to remind auditors of public companies about their responsibilities to assess and respond to the risk of material misstatement of the financial statements due to error or fraud posed by significant unusual transactions.

Staff Audit Practice Alert No. 5, Auditor Considerations Regarding Significant Unusual Transactions (Practice Alert No. 5) compiles relevant requirements from existing PCAOB auditing standards regarding significant unusual transactions to assist the auditor in reviews of interim financial information and audits of financial statements.

"The PCAOB’s message to auditors, in this challenging economic environment, has consistently emphasized attention to audit risk and adherence to existing audit requirements," said Martin F. Baumann, Chief Auditor and Director of Professional Standards.

Practice Alert No. 5 complements Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, by further addressing risks of material misstatement associated with significant unusual transactions, a risk that the staff believes continues to exist today.

Practice Alert No. 5 compiles existing requirements from PCAOB auditing standards regarding significant unusual transactions and groups them into the following categories:

• Identifying and assessing risks of material misstatement
• Responding to risks of material misstatement
• Consulting others
• Evaluating financial statement presentation and disclosure
• Communicating with audit committees
• Reviewing interim financial information

"Practice Alert No. 5 will assist auditors as they begin their work related to 2010 quarterly reviews and audits of financial statements," said Mr. Baumann.

These alerts are prepared to highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws.

Auditors should determine whether and how to respond to these circumstances based on the specific facts presented. The statements contained in Staff Audit Practice Alerts are not rules of the Board and do not reflect any Board determination or judgment about the conduct of any particular firm, auditor, or any other person.

• Staff Audit Practice Alert No. 5, Auditor Considerations Regarding Significant Unusual Transactions (April 7, 2010)

Source : PCAOB Website

Read also a related article from Journal of Accountancy in here