On August 13, 2013, the PCAOB proposed two new auditing standards to enhance the auditor’s reporting model. Each proposed standard would require additional disclosure in the auditor’s report. The first would require auditors to communicate “critical audit matters” addressed during the audit along with other information about the auditor and its responsibilities. The second would require auditors to report on their evaluation of “other information” in a company’s annual report filed with the SEC.

The first proposed standard retains the pass/fail model of the current auditor’s report, but would require the auditor to communicate a wider range of information about the audit. The proposed requirements include:

• communication of critical audit matters as determined by the auditor;
• enhancements to existing language in the auditor’s report relating to the auditor’s responsibilities for fraud and notes to the financial statements; and
• new disclosures related to auditor independence, auditor tenure and the auditor’s responsibilities for, and the results of, the auditor’s evaluation of other information outside the financial statements.

Under the proposal, critical audit matters would include those audit matters that (1) involved the most difficult, subjective or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; and (3) posed the most difficulty to the auditor in forming an opinion on the financial statements.

The second proposed standard would enhance the auditor’s responsibilities and communications with respect to “other information” in a company’s annual report outside of the financial statements. The proposed standard would:

• specify that the auditor’s responsibilities for other information apply to a company’s annual report filed with the SEC that contains the company’s audited financial statements and the related auditor’s report;
• enhance the auditor’s responsibility with respect to other information by adding procedures for the auditor to perform in evaluating other information;
• require the auditor to evaluate the other information for a material misstatement of fact or for a material inconsistency; and
• require the auditor to communicate in the auditor’s report the auditor’s responsibilities for, and the results of, the auditor’s evaluation of the other information.

As proposed, the two new standards would apply to audits of investment companies, but the PCAOB’s proposal seeks comment on whether the proposed changes to auditing standards are appropriate for investment company audits, and whether there are any considerations with respect to affiliated investment companies, master-feeder funds or fund of funds that the PCAOB should consider.

Comments are due by December 11, 2013. The proposed standards would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2015.