A newly released auditing standard issued by the American Institute of CPAs, Statement on Auditing Standards No. 131, clarifies requirements applicable to audits performed in accordance with auditing standards issued by the Public Company Accounting Oversight Board for entities that are outside the formal jurisdiction of the PCAOB. The issue has arisen with increasing frequency, since the PCAOB’s formal jurisdiction per se − incorporating the full panoply of PCAOB auditing standards, quality control standards, registration, oversight (inspection) and enforcement requirements − applies strictly to audits of public company “issuers” and non-issuer broker-dealers registered with the SEC.
However, an increasing number of non-issuer entities (i.e., outside the PCAOB’s jurisdiction) are being required by certain other regulatory agencies, or may be subject to requests by lenders or others, to engage their auditor to perform an audit in accordance with PCAOB auditing standards.
Although still a small percent of total audits, “the trend seems to be increasing, especially among other regulators − for example, the Commodity Futures Trading Commission,” says Ahava Goldman, senior technical manager at the AICPA.
“The amendment serves two purposes,” Goldman says, as to the amendments to an earlier auditing standard, SAS 122, effected by SAS 131. “One is to remind (AICPA) members that when the audit is not within the jurisdiction of the PCAOB, Generally Accepted Auditing Standards (GAAS – promulgated by the AICPA) have to be applied.” That is, even if an entity is required to or voluntarily requests that its audit be performed in accordance with PCAOB auditing standards, if that audit is outside the jurisdiction of the PCAOB, then GAAS must still be applied.
The other purpose of issuing SAS 131, says Goldman, “is to address how to report in accordance with both GAAS and PCAOB standards.” Language provided in SAS 131, including a new illustrative auditor’s report (Illustration 6), is aimed at making clear that the reference to the PCAOB in the auditor’s report in such circumstances explicitly refers to the “PCAOB’s auditing standards” and does not imply that the audit is performed under the “PCAOB’s standards” more generally (incorporating, for instance, PCAOB auditor independence requirements) unless those standards were indeed complied with, and so there will not be confusion whether the audit is under the jurisdiction of the PCAOB.
Additionally, SAS 131 states:
When the auditor refers to the standards of the PCAOB in addition to GAAS in the auditor’s report, the auditor should use the form of report required by the standards of the PCAOB, amended to state that the audit was also conducted in accordance with GAAS. This approach was developed pursuant to discussion with staff of the SEC who observed open meetings of the Auditing Standards Board.
Effective date; early adoption
The effective date of SAS 131 is “for audits of financial statements for periods ending on or after June 15, 2016.” The AICPA does not anticipate this effective date to be a problem because the standard is a clarification of existing requirements.
In a limited number of cases, says Goldman, “we had become aware of some audits, not subject to PCAOB jurisdiction, where the auditor only followed PCAOB auditing standards and not GAAS. So we hope that this will help remind folks when GAAS needs to be followed.”
“Firms that are aware of the difficulties (with respect to clarifying jurisdictional requirements), which includes all the largest firms, will probably choose to early adopt for their 2015 calendar-year audits,” she adds, noting that some of those audited financial statements may need to be submitted to regulators as early as Feb. 29. “The June date was selected (as the effective date, with early adoption permitted) because February seemed too early and December too late.”
For further information, refer to the Executive Summary of SAS No. 131, Amendment to Statement on Auditing Standards No. 122 Section 700, Forming an Opinion and Reporting on Financial Statements.