Route To: Partners Managers Staff File LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC s Guide to Auditor s Reports Thirty-seventh Edition (August 2018) Highlights of this Edition The following are some of the important new features of the 2018 Edition of PPC s Guide to Auditor s Reports: Auditing Standards Board Project to Revise the Auditor s Report. The Auditing Standards Board (ASB) has a project on its agenda to revise the auditor s report. In November 2017, the ASB issued an exposure draft of a proposed Statement on Auditing Standards (SAS) that would supersede AU-C 700, Forming an Opinion and Reporting on Financial Statements, and significantly revise the form and content of auditor s reports issued for audits of nonpublic entities. In conjunction with that proposal, the ASB also issued proposed SASs that would supersede AU-C 705, Modifications to the Opinion in the Independent Auditor s Report, and AU-C 706, Emphasis-of-Matter and Other-Matter in the Independent Auditor s Report. Your Guide includes a discussion of the primary provisions and status of the exposure drafts as well as four exhibits showing illustrative report examples based on the exposure drafts. Auditing Interpretation. In May 2018, the ASB released an auditing interpretation, Reporting on Audits Conducted in Accordance With Auditing Standards Generally Accepted in the United States of America and the Standards of the PCAOB (AU-C 9700.14.21), which addresses matters that may arise when an audit is conducted in accordance with both GAAS and PCAOB standards in light of the differing reporting standards. Your Guide includes a discussion of the auditing interpretation and a revised report drafting illustration that conforms to the requirements of PCAOB AS 3101 and is based on the interpretation. Other AICPA Activities. Your Guide also includes discussions about other AICPA projects, including decisions made at the July 2018 Auditing Standards Board meeting about a project to reconsider AU-C 720, Other Information in Documents Containing Audited Financial Statements. The Guide also includes updated guidance on an expected new SAS that would address the responsibilities of auditors to form an opinion and report on the audit of financial statements of employee benefit plans subject to ERISA. In addition, your Guide includes a discussion on a project to revise the reporting standards for financial statements prepared in accordance with special purpose frameworks and an exposure draft of a proposed Statement on Standards for Attestation Engagements that would revise portions of AT-C 105, Concepts Common to All Attestation Engagements, AT-C 205, Examination Engagements, and AT-C 210, Review Engagements. Accounting Standards Update. Since the last edition of this guide, the Financial Accounting Standards Board has issued numerous Accounting Standards Updates (ASUs). Your Guide has been updated for those new standards as well as several previously issued standards that are soon to be effective. For example, your Guide provides more extensive guidance on FASB ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, and its impact on the auditor s report after the adoption of the ASU. Your Guide also includes discussions of significant proposed ASUs, as appropriate. For example, your Guide includes an updated discussion of the reporting implications of the FASB s proposed accounting standard update, Consolidation (810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, which would permit private companies to elect not to apply the VIE consolidation guidance to legal entities under common control if neither the parent company nor the entities under common control are public entities. garsub -1-
In addition to these featured items, your Guide includes the following update items detailed below. Chapter Substantive Changes and Additions Reference CHAPTER 1 The Auditor s Standard Report 1. Updated the discussion of the Auditing Standards Board s (ASB) project to revise the auditor s report for the issuance of several exposure drafts that 100.11.16 and Exhibit 1-1 would supersede AU-C 700 and AU-C 705 and revised AU-C 706. Also updated the related example auditor s report to conform with the wording in the exposure draft that would supersede AU-C 700. 2. Updated the exhibit showing the requirements for forming an opinion and reporting on financial statements for situations where the audit is conducted in accordance with the standards of the PCAOB and GAAS. Exhibit 1-2 3. Added a footnote to the discussion of comprehensive income to address FASB ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which amends the guidance for reporting comprehensive income to reflect the changes resulting from enactment of the Tax Cuts and Jobs Act of 2017. 4. Added a footnote to the discussion of unrealized gains and losses on available-for-sale securities to address FASB ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the recognition, measurement, presentation, and disclosure standards for financial instruments and supersedes the previous guidance for equity investments. 5. Updated the discussion and report example on situations where the auditor of an entity that is not within the jurisdiction of the PCAOB conducts the audit in accordance with the PCAOB standards and GAAS for PCAOB auditing standard AS 3101, The Auditor s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and an auditing interpretation at AU-C 9700.20. 6. Noted that the ASB has a project to revise the AU- C 800 sections, including AU-C 805, to align their provisions with those in the exposure draft that would revise the auditor s standard report in AU-C 700. Paragraph 102.12, footnote 5 Paragraph 102.12, footnote 6 104.18.19 Paragraph 110.1-2-
Chapter Substantive Changes and Additions Reference 7. Updated the discussion on audits of single financial statements to note that the ASB has tentatively concluded as part of its project to revise Paragraph 110.2 AU-C 805 that AU-C 570, The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern, would apply to those audits. 8. Revised the report wording and related notes for Appendix 1A-9 PCAOB auditing standard AS 3101 and an auditing interpretation at AU-C 9700-14.21 9. Updated the Reporting Guidance Checklist for changes made throughout the Guide. Appendix 1B-1 10. Added questions to Part 1 of the checklist for Appendix 1B-2 audits conducted in accordance with GAAS and International Standards on Auditing and audits conducted in accordance with GAAS and the standards of the PCAOB. 1. Expanded the discussion on the authoritative Paragraph 202.2 literature related to materiality to discuss the guidance in AU-C 200.7. CHAPTER 2 Modifications of the Standard Report General Discussion CHAPTER 3 Departures from Generally Accepted Accounting Principles (GAAP) 2. Updated the footnote related to the FASB project, Disclosure Framework: Board s Decision Process, which tentatively would modify the description of materiality. 1. Updated the discussion of the ASB project to revise the auditor s report for the issuance of an exposure draft that would supersede AU-C 705. Also updated the related proposed auditor s report to conform with the wording in the exposure draft. 2. Added a footnote on FASB ASU 2016-02, Leases (Topic 842), with sample wording that could be used in the Basis for Qualified Opinion paragraph when a company does not disclose certain information required by FASB ASU 2016-02. 3. Added a footnote to the discussion of comprehensive income to address FASB ASU 2018-02, which amends the guidance for reporting comprehensive income to reflect the changes resulting from enactment of the Tax Cuts and Jobs Act of 2017. 4. Deleted prior-year Appendix 3A-18, the report illustration on qualified opinion when the percentage of completion method should have been used since FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), will supersede the previous guidance for revenue recognition. 5. Expanded the note on FASB ASU 2016-02 to discuss its primary requirements. Paragraph 202.3, footnote 2 300.12; 300.14, Exhibit 3-2; and 300.15 Paragraph 302.5, footnote 7 Paragraph 302.11, footnote 9 Appendix 3A Appendix 3A-2 6. Added a note on FASB ASU 2016-02. Appendix 3A-4-3-
Chapter Substantive Changes and Additions Reference 7. Revised the paragraph on basis for qualified Appendix 3A-14 opinion and added a note on FASB ASU 2016-01, which makes targeted improvements to the recognition, measurement, presentation, and disclosure standards for financial instruments. 8. Revised the report illustration to illustrate qualified Appendix 3A-19 opinion when it is not practicable to quantify the effects of the misstatement after the adoption of FASB ASU 2014-09. 9. Updated the note on a proposed Accounting Standards Update, Consolidation (810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, to discuss the latest status. Appendix 3A-24 10. Expanded the note on FASB ASU 2016-02 to Appendix 3B-2 discuss its primary requirements and added an additional note illustrating sample wording that could be used in the Basis for Qualified Opinion paragraph when a company does not disclose certain information required by FASB ASU 2016-02. 11. Added a note on FASB ASU 2016-01, which Appendix 3B-9 makes targeted improvements to the recognition, measurement, presentation, and disclosure standards for financial instruments. CHAPTER 4 Scope Limitations 1. Updated the discussion of the ASB project to revise the auditor s report for the issuance of an exposure draft that would supersede AU-C 705. Also updated the related proposed auditor s reports to conform with the wording in the exposure draft. 2. Streamlined the discussion on obtaining written representations from management based on the guidance in AU-C 580.A26. 3. Updated the status of the FASB proposed ASU on disclosure requirements for income taxes. 4. Updated the guidance on variable interest entities to discuss the FASB s final decisions related to an expected ASU that would permit private companies to elect not to apply the VIE consolidation guidance in certain situations and discussed the reporting implications should a private company elect that exemption. 5. Added a paragraph on a proposed AICPA Professional Ethics Division interpretation, entitled Responding to Non-Compliance With Laws and Regulations, which could considerably expand auditor responsibilities when they encounter actual or suspected noncompliance with laws and regulations. 400.15; 400.17, Exhibits 4-2 and 4-3; and 400.18 Paragraph 405.3 Paragraph 405.40, footnote 14 Paragraph 405.51 and footnotes 17 and 18 Paragraph 406.8 GAR 8/18-4-
Chapter Substantive Changes and Additions Reference CHAPTER 5 1. Updated footnote on proposed ASU, Paragraph 502.11, Consistency Consolidation (810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, for anticipated issuance date of a final standard. footnote 18 CHAPTER 6 Uncertainties CHAPTER 7 Other Modifications of the Standard Report CHAPTER 8 Reports on Comparative Financial Statements 1. Streamlined discussion on going concern issues to eliminate transition and effective date guidance related to SAS No. 132, The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern, since the SAS is now effective. 2. Updated the discussion on a proposal to revise the auditor s report to note that the proposed revisions would expand the discussion of the auditor s responsibilities in the auditor s report, including a statement that their responsibilities include concluding on the entity s ability to continue as a going concern and on the appropriateness of management s use of the going concern basis of accounting. 1. Updated the discussion of the ASB project to revise the auditor s report for the issuance of two exposure drafts, one that addresses communicating key audit matters in the auditor s report (which would be optional) and another that would revise AU-C 706. Also updated the related proposed auditor s report to conform with the wording in the exposure draft. 2. Added a new example emphasis-of-matter paragraph emphasizing the future effect of an accounting change to address ASU 2016-02 on leases. 3. Expanded the footnote on auditor s responsibilities regarding going concern and interim financial information to note that auditors should modify their report for a departure from GAAP if disclosures related to going concern are inadequate. 4. Added a discussion of FASB ASU 2016-01, which eliminates the cost method of accounting for equity investments. 5. Added a note to the illustrative nonprofit report for FASB ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Notfor-Profit Entities, which will require, among other things, all nonprofit organizations to present an analysis of expenses by both nature and function either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. 1. Updated the footnote on variable interest entities to discuss the FASB s final decisions related to an expected ASU that would permit private companies to elect not to apply the VIE consolidation guidance in certain situations. Section 605 and Appendixes 6A-1 6A-7 Paragraph 605.38 700.7.10 Paragraph 701.14 Paragraph 710.12, footnote 17 Appendix 7A-12 Appendix 7A-16 Paragraph 803.6, footnote 9-5-
Chapter Substantive Changes and Additions Reference CHAPTER 9 Consolidated or 1. Revised and reorganized the entire section on authoritative literature to more clearly explain the Section 901 Combined Financial requirements for consolidated financial Statements statements, the requirements when an entity does not have a controlling financial interest (including a discussion of FASB ASU 2016-01), and the guidance related to combined financial statements. CHAPTER 10 Group Audits CHAPTER 11 Supplementary Information CHAPTER 12 Other Entities 2. Updated the guidance on variable interest entities to discuss the FASB s final decisions related to an expected ASU that would permit private companies to elect not to apply the VIE consolidation guidance in certain situations and discussed the reporting implications should a private company elect that exemption. 3. Clarified heading and notes on report drafting illustration to note that the disclaimer of opinion relates to the financial position, results of operations, and cash flows of the individual companies. 1. Added a note on FASB ASU 2016-01, which would eliminate the cost method of accounting for equity investments. 2. Expanded the footnote to discuss FASB ASU 2016-01, which would eliminate the cost method of accounting for equity investments. 3. Revised the Basis for Qualified Opinion paragraph in the illustrative qualified report to note that the other auditors were not able to obtain sufficient appropriate audit evidence by other auditing procedures. 1. Updated the status of the project to revise AU-C 720 and added a new paragraph to discuss the decisions that were made at the July 2018 ASB meeting related to the project. 2. Added a note to the illustrative report discussing the dating of the auditor s report on the supplementary information and illustrating the wording when the auditor dual dates the report. 1. Updated the discussion, status, and principal provisions of an expected new Statement on Auditing Standards, which would address the responsibilities of auditors to form an opinion and report on the audit of financial statements of employee benefit plans subject to ERISA. 2. Revised the terminology to refer to ERISA Section 103(a)(3)(C) audits based on the ASB project related to forming an opinion and reporting on the audit of financial statements of employee benefit plans subject to ERISA. Those audits were previously referred to as DOL limited scope audits. Paragraph 901.5 and footnote 3 Appendix 9B-2 Paragraph 1000.1, footnote 1 Paragraph 1005.2, footnote 8 Appendix 10A-10 1108.3 and 1108.9 Appendix 11A-2 1206.11.13 1206.21.22 and footnote 9 GAR 8/18-6-
Chapter Substantive Changes and Additions Reference 3. Revised the section to more fully discuss the Section 1207 primary provisions of ASU 2016-14 and its impact on the auditor s report after the adoption of the ASU. 4. Revised the heading of the report drafting Appendix 12A-17 illustration to note that the report is appropriate before the adoption of FASB ASU 2016-14. Also added a note referencing Appendix 12A-18 for the appropriate reporting for voluntary health and welfare organizations before the adoption of FASB ASU 2016-14 and for all nonprofit organizations after the adoption of FASB ASU 2016-14. 5. Revised the heading and related notes to indicate that the report drafting illustration is appropriate for all nonprofit organizations after the adoption of FASB ASU 2016-14 and for voluntary health and welfare organizations before the adoption of FASB ASU 2016-14. Also added a note to indicate that FASB ASU 2016-14 will require, among other things, all nonprofit organizations to present an analysis of expenses by both nature and function either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. Appendix 12A-18 CHAPTER 13 Special Reports CHAPTER 14 Reporting on Internal Control 1. Added a discussion of the ASB project to revise the auditor s report, which would also result in a proposal to supersede the auditing standards for special reports in the AU-C 800 sections to align their provisions with those proposed for AU-C 700. Also summarized the ASB s principal tentative decisions regarding the proposed revisions of the AU-C 800 sections. 2. Expanded the discussion of going concern considerations for special reports to discuss the ASB s project to revise the AU-C 800 sections and to address its tentative conclusions on whether AU-C 570 would apply to special reports. 3. Added a discussion of an exposure draft of a proposed Statement on Standards for Attestation Engagements that would revise portions of AT-C 105, Concepts Common to All Attestation Engagements, AT-C 205, Examination Engagements, and AT-C 210, Review Engagements. 4. Expanded the note on FASB ASU 2016-02 to discuss its primary requirements. 5. Expanded a note to refer to an exposure draft that would revise portions of AT-C 105, AT-C 205, and AT-C 210. 1. Added a footnote about the need to communicate control deficiencies relevant to cybersecurity to management and those charged with governance. 1300.5.7 1301.25.26 1314.19.20 Appendix 13C-2 Appendixes 13D-1 and 13D-2 Paragraph 1401.1, footnote 8-7-
Chapter Substantive Changes and Additions Reference 2. Expanded guidance in bracketed paragraph on describing the significant deficiencies that were identified during the integrated audit to note that the potential effects do not have to be quantified. Appendix 14B-6 GAR 8/18-8-