By Henry Chavez
Spiegel Accountancy Corp.

After seemingly eons of time that we have had to become familiar with the standard auditor’s report, it is about to categorically change. That’s right, the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) has changed the auditor’s report by issuing Statement of Auditing Standard (SAS) No. 134, Auditor Reporting and Amendments, including Amendments Addressing Disclosures in the Audit of Financial Statements. This new auditor’s report, which becomes
effective for all reporting periods ending on or after December 15, 2021, is designed to give us a whole new literary thrill in
audit reporting because the report is presumably more relevant and transparent. Be forewarned as I attempt to elaborate
on the new standard with an injection of humor. After all, who wants to read a dry article on auditor’s reports?

Why the Change?

The ASB issued the new auditor’s report to coincide with international auditing and assurance standards and create consistency with the auditor’s report previously issued by the Public Company Accounting Oversight Board.

The new auditor’s report is intended to increase its value by providing more transparency into the audit and supplying the user with more information on the auditor’s and management’s responsibility for the audit.

What Are the Changes?

1) Facelift

The first thing you will notice is the entire structure of the auditor’s report was flipped. In short, the audit opinion now comes first rather than last. Yes sir, no more waiting for the auditor’s punch line to come at the end of the joke, as it will now come first.

Report on the Audit of the Financial Statements (Template):
Opinion
We have audited the financial statements of Company X, which comprises the balance sheet as of December 31, 2021, and the related statements of income, changes in stockholders’ equity, 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 Company X as of December 31, 2021, 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.

2) We are independent, ethical, and we own it

The “Basis for the Opinion” is a new section in the auditor’s report that provides clarity regarding the auditor’s obligations. Here is something new in the paragraph: we are ethical and independent. We as auditors find this amusing, and you should too since this is the reason you hired us.

Basis for Opinion (Template):
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 Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Company X 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.

3) Management, you are still responsible, too

Management, you are lucky! Not much has changed in what we have to say about your role in making sure the financial statements are correct. Essentially, you must promise us your company will not fold within 12 months of issuing the financial statements. Remember, management is responsible for the financial statements, not the auditor.

Responsibilities of Management for the Financial Statements (Template)
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 Company X’s ability to continue as a going concern for one year after the date that the financial statements are issued.

4) A discourse on your auditor and what work we do in your audit

Anyone who reads the new auditor’s report will now have the joy of obtaining an auditor’s “101 guide” through the audit process. Voilà! Here is everything you wanted to know about the steps auditors perform.

Auditor’s Responsibilities for the Audit of the Financial Statements (Template)

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 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 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 Company X’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 Company X’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.

5) The new and exciting Key Audit Matters (KAM)

The intent of this new, optional paragraph in the auditor’s report is to disclose the most important audit matters encountered during the audit. The spirit of this new paragraph is to provide better information to users of the financial statements and to
improve governance. While the AICPA may be excited about this revision, it remains to be seen how beneficial it may be to the
reader of the financial statements. Further, key audit matters are already discussed in the communication with those charged
with governance letter that auditors are required to provide to management.

Key Audit Matters (Example)
Key audit matters are those matters that were communicated with those charged with governance and, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

The most sensitive accounting estimate affecting the financial statements is Company X’s estimate of the collectability and valuation of mortgage loans receivable, which is based on historically collections and the fair value of collateral. We evaluated and tested the key factors and assumptions used to determine fair value and found them to be reasonable in relation to the financial statements taken
as a whole.


Are You Ready For the Change?


The two issues management should consider prior to the adoption of SAS 134 are as follows:

  • Do I need to inform the readers of the financial statements about the change in financial statement reporting?

In truth, the changes to the auditor’s report should not impact the viewpoint of any reader. Therefore, you should not have to prepare them for it, other than letting them changes exist.

  • Should you elect to include KAMs in the auditor’s report?

Given that the paragraph is optional, prior to including it, management should really consider whether it adds value to the readers of your financial statements. If you have any questions about SAS 134, please contact me. I’m happy to help.

Henry Chavez serves as a strategic resource for growing organizations, guiding their development and success. A seasoned public accountant, Henry provides assurance and business consulting services to privately held businesses in the financial services, manufacturing and distribution, technology, and non-profit sectors.