AS 1301 Requirements for Audit Committee Communications
AS 1301 establishes a framework for effective two-way dialogue between auditors and audit committees to enhance financial reporting oversight.
Auditing Standard 1301 is a directive from the Public Company Accounting Oversight Board (PCAOB) that outlines required communications between a company’s external auditor and its audit committee. The standard’s goal is to ensure a structured, transparent dialogue for the audit committee to effectively oversee the company’s financial reporting process. It mandates a two-way exchange where the auditor provides insights and the committee offers relevant information for the audit.
Establishing the Audit Engagement Framework
Before an audit begins, AS 1301 requires the auditor to establish the engagement’s terms with the audit committee, documented in an engagement letter. The auditor must explain their responsibilities under PCAOB standards, clarifying that an audit provides reasonable assurance, not absolute certainty, that financial statements are free from material misstatement.
This dialogue must also include an overview of the overall audit strategy, including the planned scope and timing of the audit. If other accounting firms are involved in auditing components of the company, the lead auditor must communicate their roles to the audit committee.
Key Communications on Audit Findings
A significant part of AS 1301 covers the communication of the audit’s results. The auditor must discuss several key findings with the audit committee, including:
- Significant accounting policies and practices: This includes the auditor’s view on their appropriateness, the clarity of disclosures, and the effect of new accounting pronouncements.
- Critical accounting estimates: The auditor communicates the process management used to develop estimates, highlights significant subjective assumptions, and provides an assessment of their reasonableness.
- Significant unusual transactions: The communication should cover the business rationale for these transactions and whether they seem structured to obscure the company’s financial performance.
- Quality of the company’s financial reporting: This is a broad assessment of the clarity and neutrality of the accounting principles applied, providing a perspective on whether reporting is transparent or biased.
- Disagreements and difficulties: The auditor must inform the committee about any disagreements with management on financial reporting matters and any significant difficulties encountered, like unreasonable delays.
- All audit misstatements: This includes all misstatements corrected by management and those that were not. For uncorrected items, the auditor discusses their potential impact on the financial statements.
Ensuring Auditor Independence and Addressing Other Required Topics
AS 1301 requires specific communications on auditor independence. Annually, the auditor must provide the audit committee with a written affirmation of their independence, describing all relationships between the firm and the company that could affect objectivity. This allows the committee to make its own informed judgment.
If the auditor has substantial doubt about the company’s ability to continue as a “going concern” for a reasonable period, typically one year, they must communicate these concerns. This discussion includes the conditions identified and management’s plans to mitigate them.
The auditor must also communicate their responsibilities for “other information” included in documents containing audited financial statements, such as the Management’s Discussion and Analysis (MD&A) section of an annual report. The auditor outlines any procedures performed on this information and reports the results.