An Analysis of PCAOB's New Reporting Standards and Their Implications

This report provides a comprehensive analysis of the new audit reporting standards introduced by the Public Company Accounting Oversight Board (PCAOB). It details the key changes in reporting requirements, including the disclosure of critical audit matters and auditor tenure. The report compares the approaches of PCAOB and the International Auditing and Assurance Standards Board (IAASB), highlighting similarities and differences in their audit reporting requirements. It examines the reasons behind the changes, emphasizing the goal of enhancing transparency and protecting the interests of shareholders and investors. Furthermore, the report assesses the impact of these changes on audit practices, emphasizing the need for auditors to apply more extensive audit procedures and the potential for improved audit quality and investor trust. The analysis also includes references to relevant research and regulatory documents.

Running Head: PCAOB’s introduction of New Reporting Standards
NEW STANDARDS
ON AUDIT
REPORTING

PCAOB’s introduction of New Reporting Standards 1
Key changes in the reporting requirements of the audit
report
Public Company Accounting Oversight Board is the regulatory body which is in existence to
regularise the auditors of public companies. PCAOB adopts the new auditing standards on
time to time basis as per the requirements of the changing market environment. It has
announced the new auditing standards recently in order to widen the scope of audit reporting
done by the auditors as a part of their audit engagement. The new standard aims at enhancing
the quality of audit reports and making the reports more informative so as to raise the
authenticity of the audit report in the eyes of intended users. Along with the previous
reporting requirements PCAOB has directed the auditors of public companies to provide the
additional information relating to the critical audit matters of the entity. Critical audit matters
are those matters in which auditor has to apply subjective professional judgements during the
audit engagement and requires communication of such matters to the audit committee
(Christensen, Glover & Wolfe, 2014). Also, the auditors conducting the audit under the
standards prescribed by the PCAOB are required to disclose in the audit report, their audit
tenure i.e. the date from which they have started giving professional services to the company
on a consistent basis. PCAOB has introduced a new format to report and the changed format
demands the auditors to state the fact that auditors are independent parties and hence their
opinion is not influenced by any external factors (Ning Chiu, 2017). Auditors are also
required to incorporate a new phrase in the audit report starting with the words as ‘’whether
due to frauds and errors’’ while describing their responsibilities in relation to provision of
reasonable assurance about the true and fair view of financial statements. While reporting the
critical audit matters auditors are also subjected to describe the considerations that enabled

PCAOB’s introduction of New Reporting Standards 2
them to identify the matters as critical and the manner in which such critical matters are dealt
with.
Similarity and Differences between the IAASB &
PCAOB’’s audit reporting approaches
The International Auditing and Assurance Standards Board (IAASB) & Public company
accounting oversight board (PCAOB) pursues almost similar approaches to enhance the
reporting requirement for the auditors as both the regulatory bodies are aimed to promote
greater level of transparency in the financial reports of the company. The auditors are
required to report on the key audit matters and the critical audit matters of only current
financial year as per both the boards. Key audit matters are defined by IAASB as the matters
holding high significance in the overall audit and are necessary to be reported to the investors
to draw their attention. These matters requires communication with those charged with
governance about the key concern. Whereas the critical audit matters are defined by the
PCAOB. Even after the having the similar objectives in relation to auditing practices, the
approaches followed by both the boards varies in terms of documentation requirements and
other areas (IAASB, 2017). IAASB requires the auditors to document the matters which had
seek auditors attention and the logical reasons for the determination as to whether a particular
matter arising of audit is key audit matter or not. However, PCAOB sets out the requirement
of identifying and reporting all the matters that were communicated to the company’s audit
committee no matter whether they were determined as critical audit matters or not. Further,
PCAOB restricts the auditors to communicate to the critical audit matters in the cases where
adverse opinion is being expressed (PCAOB, 2017). On the other hand, IAASB permits the
auditors to communicate the key audit matters even when the auditor expresses adverse
opinion. But in case where disclaimer of opinion is being provided by the auditors both

PCAOB’s introduction of New Reporting Standards 3
IAASB and PCAOB restricts the reporting of the key and critical audit matters (Gramling,
Krishnan & Zhang, 2011)
Reasons for the changes in the audit report and the
analysis whether these changes are likely to achieve
the aims
The main objective behind the adaptation of new audit reporting standards is to promote more
transparency in the audit reports so as to protect the interests of the shareholders and
investors of the company. With the growing complexities of businesses of public companies
and their audit procedures, the investors of the companies are constantly demanding the
additional information by the means of audit report so that they can be acknowledged about
the true financial position of the company. Moreover, due to the increasing complexities it
was difficult for the intended users of the audit reports to understand the audit opinion of the
auditors. Adaptation of such standards will be in the interest of company and all its
stakeholders in terms of transparency. The compliance with the new standards will not only
contribute to company and auditors good image in the eyes of investors and shareholders
Hence these changes will bring the positive change in the audit reporting practices. Therefore
it can be said the changes brought through the introduction of new auditing standards will
achieve their core purposes.
Impact of changed audit reporting requirements on the
audit practices
The new audit reporting standards requires the auditors of the companies to apply extensive
audit procedures in the areas where auditor finds the need of applying more complex and
subjective auditor’s professional judgement. The investor’s demand for more informative and

PCAOB’s introduction of New Reporting Standards 4
accurate audit reports will ultimately enhance the overall quality of audit practices conducted
by the auditors as they will have to remain more focused towards their assurance services in
order to earn investor’s trust (Christensen, 2016). The basic principle of auditor’s
independence will gain more value in the new reporting framework as it is aiming at the
protection of investor’s interest. Identification and reporting of critical audit matters will
foster the communication between the auditors and audit committees of the company thereby
enabling the auditors to understand the audit matters more precisely.

PCAOB’s introduction of New Reporting Standards 5
References
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in
the audit report change nonprofessional investors' decision to invest?. Auditing: A Journal of
Practice & Theory, 33(4), pp.71-93
Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), pp.1648-1684.
Gramling, A.A., Krishnan, J. and Zhang, Y., 2011. Are PCAOB-identified audit deficiencies
associated with a change in reporting decisions of triennially inspected audit
firms?. Auditing: A Journal of Practice & Theory, 30(3), pp.59-79.
Gunny, K.A. and Zhang, T.C., 2013. PCAOB inspection reports and audit quality. Journal of
Accounting and Public Policy, 32(2), pp.136-160.
International Auditing and Assurance Standards Board, 2017, The New Auditor’s Report: A
COMPARISON BETWEEN THE IAASB AND THE US PCAOB STANDARDS, Available
at: https://www.ifac.org/system/files/publications/files/Auditor-Reporting-Comparison-
between-IAASB-Standards-and-PCAOB-Standard.pdf (assessed on 28.09.2017).

PCAOB’s introduction of New Reporting Standards 6
Ning chiu 2017, Briefing: Governance PCAOB Adopts Requirement to Disclose Critical
Audit Matters in Auditor Reports,Available at:
https://www.briefinggovernance.com/2017/06/pcaob-adopts-requirement-to-disclose-
critical-audit-matters-in-auditor-reports/ (assessed on 28.09.2017).
Public company accounting oversight board, 2017, PCAOB Adopts New Standard to
Enhance the Relevance and Usefulness of the Auditor's Report with Additional Information
for Investors, Available at: https://pcaobus.org/News/Releases/Pages/auditors-report-
standard-adoption-6-1-17.aspx (assessed on 28.09.2017).
Public company accounting oversight board, 2017, The Auditor's Report On An Audit Of
Financial Statements When The Auditor Expresses An Unqualified Opinion And Related
Amendments to PCAOB Standards, Available at:
https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf (assessed
on 28.09.2017).