16 also requires the auditor to communicate the reasons certain
accounting policies and practices are considered critical and how
current and anticipated future events might affect the determination of
whether certain policies and practices are considered critical.\76\
---------------------------------------------------------------------------

    \75\ Section 10A(k) of the Exchange Act, 15 U.S.C. 78j-1(k),
requires the auditor to report this information to the audit
committee. See also SEC Rule 2-07 of Regulation S-X (``SEC Rule 2-
07''), 17 CFR 210.2-07.
    \76\ See Securities Act Release No. 8183, which describes the
SEC's expectations regarding the discussion related to critical
accounting policies and practices. In this release, the SEC
indicated that it anticipated that the discussion of accounting
policies and practices would include how current and anticipated
future events might affect the determination of whether certain
policies and practices are considered critical.
---------------------------------------------------------------------------

    Some commenters recommended deleting the requirement for the
auditor to communicate how anticipated future events might affect the
determination of whether certain policies and practices are considered
critical since the auditor cannot predict the future. The standard
retains the SEC requirement regarding communication of anticipated
future events related to critical accounting policies and practices, as
this is a component of the required communication the SEC identified in
adopting SEC Rule 2-07.\77\ The standard notes that critical accounting
policies and practices are tailored to specific events in the current
year and that the accounting policies and practices that are considered
critical might change from year to year. For example, a significant
merger or acquisition may result in the related accounting policy being
considered critical in the current year in which the related
transaction occurs, but not in subsequent years. Auditing Standard No.
16 is aligned with the SEC requirement, therefore the standard was not
revised.
---------------------------------------------------------------------------

    \77\ Id.
---------------------------------------------------------------------------

Critical Accounting Estimates (Paragraph 12.c. of Auditing Standard No.
16)
    Auditing Standard No. 16 requires the auditor to communicate the
following matters related to critical accounting estimates:
    7. A description of the process management used to develop critical
accounting estimates;
    8. Management's significant assumptions used in critical accounting
estimates that have a high degree of subjectivity; and
    9. Any significant changes management made to the processes used to
develop critical accounting estimates or significant assumptions, a
description of management's reasons for the changes, and the effects of
the changes on the financial statements.
    As the term ``critical accounting estimate'' implies, the
communication is not designed to encompass a long list of accounting
estimates resulting from the application of accounting policies that
cover a substantial number of line items in the company's financial
statements. Rather, Auditing Standard No. 16 defines the term
``critical accounting estimate'' as an accounting estimate where (a)
the nature of the estimate is material due to the levels of
subjectivity and judgment necessary to account for highly uncertain
matters or the susceptibility of such matters to change and (b) the
impact of the estimate on financial condition or operating performance
is material.
    The definition of ``critical accounting estimate'' is based on SEC
interpretive guidance in connection with management's discussion and
analysis (``MD&A'') of the company's financial condition and results of
operations.\78\ The alignment of the term critical accounting estimates
in PCAOB standards with the same term in the SEC's interpretive
guidance allows auditors to use the same concept under SEC requirements
and PCAOB standards when communicating matters to the audit committee.
The term critical accounting estimate is used to help focus the
communication to the audit committee on those estimates that might be
subject to a higher risk of material misstatement, such as certain fair
value estimates. The definition of a critical accounting estimate is
intended to

replace the term ``particularly sensitive'' in AU sec. 380.\79\
---------------------------------------------------------------------------

    \78\ See SEC, Interpretation: Commission Guidance Regarding
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Securities Act Release No. 8350 (Dec. 19,
2003).
    \79\ See AU sec. 380.08, which stated in part, ``[c]ertain
accounting estimates are particularly sensitive because of their
significance to the fin018ial statements and because of the
possibility that future events affecting them may differ markedly
from management's current judgments.''
---------------------------------------------------------------------------

    The requirement to communicate the process management used to
develop critical accounting estimates is adapted from the requirement
in AU sec. 380 related to particularly sensitive accounting
estimates.\80\ Additionally, the communication requirements are
designed to communicate the results of the auditor's performance
requirements under AU sec. 342, Auditing Accounting Estimates, which
requires the auditor to evaluate the reasonableness of accounting
estimates. In evaluating the reasonableness of the accounting estimate,
AU sec. 342 also requires the auditor to obtain an understanding of how
management developed the estimate.\81\ AU sec. 342 also states that in
evaluating the reasonableness of an estimate, the auditor normally
concentrates on key factors and assumptions that are (a) significant to
the accounting estimate, (b) sensitive to variations, (c) deviations
from historical patterns, and (d) subjective and susceptible to
misstatement and bias.\82\
---------------------------------------------------------------------------

    \80\ AU sec. 380.08.
    \81\ See AU sec. 342.10.
    \82\ See AU Sec. 342.09.
---------------------------------------------------------------------------

    One commenter suggested that the communication requirement also
include how management subsequently monitors critical accounting
estimates and, when critical accounting estimates involve a range of
possible outcomes, how the recorded estimates relate to the range and
how various selections within the range would affect the company's
financial statements. Although these requirements are not included in
Auditing Standard No. 16, the Board notes that the SEC has stated that
management should disclose the company's critical accounting estimates
in MD&A.\83\ According to the related SEC release, management's
discussion should present, among other matters, the company's analysis
of the uncertainties involved in applying a principle at a given time
or the variability that is reasonably likely to result from its
application over time and analyze an estimate's specific sensitivity to
change based on other outcomes that are reasonably likely to occur and
would have a material effect.\84\ The commenter's concerns, therefore,
may be addressed through a company's MD&A disclosures.
---------------------------------------------------------------------------

    \83\ See Securities Act Release No. 8350.
    \84\ Id.
---------------------------------------------------------------------------

    AU sec. 550, Other Information in Documents Containing Audited
Financial Statements, requires the auditor to read the other
information, such as MD&A in documents containing audited financial
statements, and consider whether the information, or the manner of its
presentation, is materially inconsistent with information in the
financial statements or is a material misstatement of fact.\85\
Auditing Standard No. 16 includes a requirement for the auditor to
communicate to the audit committee the results of such procedures.
Accordingly, no change was made to the standard.
---------------------------------------------------------------------------

    \85\ AU secs. 550.04-.05.
---------------------------------------------------------------------------

Significant Unusual Transactions (Paragraph 12.d. of Auditing Standard
No. 16)
    Auditing Standard No. 16 includes requirements for the auditor to
communicate to the audit committee (1) significant transactions that
are outside the normal course of business for the company or that
otherwise appear to be unusual due to their timing, size, or nature;
\86\ and (2) the policies and practices management used to account for
significant unusual transactions. Communication of significant unusual
transactions would enable the audit committee to gain the auditor's
insight into those transactions and to take any appropriate action.
---------------------------------------------------------------------------

    \86\ See paragraph 71.g. of Auditing Standard No. 12.
---------------------------------------------------------------------------

    The requirement in the standard for the auditor to communicate the
policies and practices management used to account for significant
unusual transactions is similar to the requirement in AU sec. 380.\87\
Under Auditing Standard No. 16, such communication also would include
the identification of significant unusual transactions.
---------------------------------------------------------------------------

    \87\ AU sec. 380.07.
---------------------------------------------------------------------------

    The reproposed standard required the auditor to communicate
significant unusual transactions, of which the auditor is aware, that
are outside the normal course of business for the company or otherwise
appear to be unusual due to their timing, size, or nature. Many
commenters indicated that management also might communicate matters
related to significant unusual transactions to the audit committee and
that the standard should acknowledge that management might make the
communications related to significant unusual transactions. The
standard was revised to recognize that management might make these
communications to the audit committee and that, in those situations,
the auditor might not need to communicate the information at the same
level of detail as management as long as certain criteria specified in
the standard are met. However, the auditor should communicate any
omitted or inadequately described matters to the audit committee.
    Additionally, some commenters suggested that the communication
should be limited to significant unusual transactions that are
considered significant risks. While a significant unusual transaction
might also be considered a significant risk, this communication
provides the audit committee with additional information regarding the
significant unusual transactions and the policies and practices
management used to account for such transactions, even if such
transactions do not constitute significant risks. Significant unusual
transactions, at times, have been considered to be a contributing
factor in attempts to mislead investors about a company's financial
condition. Therefore, providing the audit committee with information
regarding significant unusual transactions could benefit the audit
committee in its oversight of the financial reporting process.
    Some commenters suggested that the standard include a definition of
the term ``significant unusual transactions.'' Auditing Standard No. 16
describes significant unusual transactions as significant transactions
that are outside the normal course of business for the company or that
otherwise appear to be unusual due to their timing, size, or nature,
which is consistent with the description of this term in other PCAOB
standards, such as Auditing Standard No. 12.\88\ Therefore, the
standard was not revised to further define significant unusual
transactions.
---------------------------------------------------------------------------

    \88\ Paragraph 71.g. of Auditing Standard No. 12.
---------------------------------------------------------------------------

Consideration of Communications Made by Management (Note to Paragraph
12 of Auditing Standard No. 16)
    Auditing Standard No. 16 retains the substance of the communication
requirements in AU sec. 380 regarding accounting policies, practices,
and estimates. The requirement in the standard for the auditor to
communicate critical accounting policies and practices is consistent
with Section 10A(k) of the Exchange Act, which requires auditors of
issuers to report all critical accounting policies and practices to the
issuer's audit committee.\89\ In addition, Auditing

Standard No. 16 includes a new requirement related to the communication
of significant unusual transactions.
---------------------------------------------------------------------------

    \89\ See also SEC Rule 2-07.
---------------------------------------------------------------------------

    Many commenters suggested that the standard should recognize that
management has the primary responsibility for reporting to the audit
committee and that the auditor's responsibility should be to confirm
that management has appropriately communicated. No change was made in
response to this comment because, similar to AU sec. 380, Auditing
Standard No. 16 acknowledges that management also may be communicating
certain matters related to the financial reporting process to the audit
committee. The Board recognizes that management as well as the auditor
might discuss accounting policies, practices, estimates, and
significant unusual transactions with the audit committee and that it
would not be cost-effective or practical for the audit committee to
listen to essentially the same presentation twice. Therefore, Auditing
Standard No. 16 indicates that, in situations in which management
communicates matters in paragraph 12, the auditor's communication
requirement under the standard would be met if the auditor: (1)
Participates in management's discussion with the audit committee,\90\
(2) affirmatively confirms to the audit committee that management has
adequately communicated these matters, and (3) with respect to critical
accounting policies and practices, identifies for the audit committee
those accounting policies and practices that the auditor considers
critical. In addition, the auditor should communicate any omitted or
inadequately described matters to the audit committee.
---------------------------------------------------------------------------

    \90\ The auditor's participation in management's discussion with
the audit committee could be satisfied in person or via audio or
video conference.
---------------------------------------------------------------------------

    In situations in which management makes those communications to the
audit committee, in order to satisfy the communication requirement in
Auditing Standard No. 16, the auditor would be required to participate
during discussions between management and the audit committee regarding
accounting policies, practices, estimates, and significant unusual
transactions, which may include discussions of the importance of
critical accounting policies, practices or estimates, or the difficult,
subjective, or complex nature of the judgment involved in significant
unusual transactions, or the selection or application of accounting
policies, practices, or estimates. If the auditor to identifies the
accounting policies and practices that the auditor considers critical
to the portrayal of the company's financial condition and results and
affirmatively confirms that management has adequately communicated the
accounting policies, practices, estimates, and significant unusual
transactions to the audit committee in a meeting in which the auditor
participated the auditor would be deemed to satisfy the requirement for
the auditor to report all critical accounting policies and practices to
the audit committee, without the need for the auditor to repeat
management's presentation on the same topic.
    Conversely, if the auditor (1) did not participate in management's
meeting with the audit committee in which communication regarding
accounting policies, practices, estimates, and significant unusual
transactions occurred, (2) did not affirmatively confirm that
accounting policies, practices, estimates, and significant unusual
transactions had been discussed adequately by management, or (3) with
respect to critical accounting policies and practices, did not identify
those accounting policies and practices that the auditor considers
critical, then the auditor would be required to communicate to the
audit committee the matters described in paragraph 12 of Auditing
Standard No. 16, regardless of any management communication regarding
those matters.
Auditor's Evaluation of the Quality of the Company's Financial
Reporting (Paragraph 13 of Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate
certain matters to the audit committee regarding the auditor's views of
the audit and the financial statements as described below.
Qualitative Aspects of Significant Accounting Policies and Practices
(Paragraph 13.a. of Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate the
results of the auditor's evaluation of, and conclusions about, the
qualitative aspects of the company's significant accounting policies
and practices, including situations in which the auditor identified
bias in management's judgments about the amounts and disclosures in the
financial statements. This requirement is similar to certain
communication requirements that have been superseded. AU sec. 380
required the auditor to discuss with the audit committee the auditor's
judgments about the quality, not just the acceptability, of the
company's accounting principles.\91\ Additionally, AU sec. 9312, Audit
Risk and Materiality in Conducting an Audit: Auditing Interpretations
of Section 312, required the auditor to consider whether matters
related to management bias should be communicated to the audit
committee.\92\
---------------------------------------------------------------------------

    \91\ AU sec. 380.11.
    \92\ Following the original proposal of this standard, AU sec.
9312 was superseded when the Board adopted the risk assessment
standards. The performance requirement of AU sec. 9312, however, was
substantially included in the risk assessment standards.
---------------------------------------------------------------------------

    The requirement in Auditing Standard No. 16 is designed for the
auditor to communicate the results of the auditor's procedures under
Auditing Standard No. 14, Evaluating Audit Results, which requires the
auditor to, among other things, evaluate the qualitative aspects of the
company's accounting practices,\93\ including potential bias in
management's judgments about the amounts and disclosures in the
financial statements.\94\
---------------------------------------------------------------------------

    \93\ See paragraphs 24-27 of Auditing Standard No. 14.
    \94\ Id.
---------------------------------------------------------------------------

    Additionally, Auditing Standard No. 16 requires the auditor to
communicate to the audit committee the results of the auditor's
evaluation of the differences between (i) estimates best supported by
audit evidence and (ii) estimates included in the financial statements,
which are individually reasonable, that indicate a possible bias on the
part of the company's management. This communication is designed for
the auditor to discuss the results of the auditor's evaluation of these
matters as required under Auditing Standard No. 14.\95\ Linking the
communication requirements with performance requirements in Auditing
Standard No. 14 provides context regarding the matters to be
communicated.
---------------------------------------------------------------------------

    \95\ See paragraph 27 of Auditing Standard No. 14.
---------------------------------------------------------------------------

    Some commenters suggested that the standard should retain the
requirement in AU sec. 380 for the auditor to discuss with the audit
committee the auditor's judgments about the quality, not just the
acceptability, of the entity's accounting principles. Auditing Standard
No. 16 modifies the requirement from AU sec. 380 by requiring the
auditor to communicate to the audit committee the results of the
auditor's evaluation of, and conclusions about, the qualitative aspects
of the company's significant accounting policies and practices, while
linking the communication requirement to the performance requirement in
Auditing Standard No. 14. Therefore, no

change was made in response to these comments.
Assessment of Critical Accounting Policies and Practices (Paragraph
13.b. of Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee the auditor's assessment of management's disclosures
related to the critical accounting policies and practices, along with
any significant modifications to the disclosures of those policies and
practices proposed by the auditor that management did not make. This
requirement is based on the Exchange Act's requirement that the auditor
report to the audit committee all critical accounting policies and
practices.\96\ In the release adopting the SEC's related rule, the SEC
indicated that it anticipated that the auditor's communications to the
audit committee regarding critical accounting policies would include an
assessment of management's disclosures along with any significant
proposed modifications by the auditor that were not included in those
disclosures.\97\
---------------------------------------------------------------------------

    \96\ See Section 10A(k) of the Exchange Act, 15 U.S.C. 78j-1(k);
and SEC Rule 2-07.
    \97\ See Securities Act Release No. 8183.
---------------------------------------------------------------------------

Conclusions Regarding Critical Accounting Estimates (Paragraph 13.c. of
Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate the
basis for the auditor's conclusions regarding the reasonableness of the
critical accounting estimates. This requirement is similar to a
requirement in AU sec. 380.\98\ This requirement is designed to require
the auditor to communicate the results of the auditor's procedures
regarding critical accounting estimates under PCAOB standards, such as
AU sec. 342.\99\ Communicating these results will provide the audit
committee with the auditor's assessment of the critical accounting
estimates based on the auditor's procedures.
---------------------------------------------------------------------------

    \98\ See AU sec. 380.08.
    \99\ See AU secs. 342.04, 09-.10.
---------------------------------------------------------------------------

Significant Unusual Transactions (Paragraph 13.d. of Auditing Standard
No. 16)
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee the auditor's understanding of the business rationale
for significant unusual transactions. This communication requirement is
aligned with the performance requirement in AU sec. 316, Consideration
of Fraud in a Financial Statement Audit, which requires the auditor to
gain an understanding of the business rationale regarding significant
transactions that are outside the normal course of business or that
otherwise appear unusual.\100\ This communication would provide the
audit committee with an opportunity to receive the auditor's
perspective of such transactions.
---------------------------------------------------------------------------

    \100\ See AU sec. 316.66.
---------------------------------------------------------------------------

    In a separate rulemaking project, the Board has proposed amendments
to AU sec. 316 that would require the auditor to design and perform
procedures to obtain an understanding of the business purpose (or lack
thereof) of each significant unusual transaction and evaluate whether
the business purpose (or the lack thereof) indicates that the
significant unusual transaction may have been entered into to engage in
fraudulent financial reporting or conceal misappropriation of
assets.\101\ If, at the conclusion of that rulemaking project, the
Board adopts the proposed amendments to AU sec. 316, the Board will
consider, as appropriate, amending Auditing Standard No. 16 to align
the communication with any new performance requirements.
---------------------------------------------------------------------------

    \101\ Proposed Auditing Standard--Related Parties, Proposed
Amendments to Certain PCAOB Auditing Standards Regarding Significant
Unusual Transactions, and Other Proposed Amendments to PCAOB
Auditing Standards, PCAOB Release No. 2012-001 (Feb. 28, 2012).
---------------------------------------------------------------------------

Financial Statement Presentation (Paragraph 13.e. of Auditing of
Auditing Standard No. 16)
    Similar to AU sec. 380.11, Auditing Standard No. 16 requires the
auditor to communicate to the audit committee the results of the
auditor's evaluation of whether the presentation of the financial
statements and the related disclosures are in conformity with the
applicable financial reporting framework, including the auditor's
consideration of the form, arrangement, and content of the financial
statements (including the accompanying notes), encompassing matters
such as the terminology used, the amount of detail given, the
classification of items, and the bases of amounts set forth. This
communication requirement relates to the auditor's evaluation of
whether the financial statements are presented fairly, in all material
respects, in conformity with the applicable financial reporting
framework, as required by Auditing Standard No. 14.\102\
---------------------------------------------------------------------------

    \102\ See paragraphs 30-31 of Auditing Standard No. 14, which
describe the auditor's responsibility relating to the evaluation of
whether the financial statements are presented fairly, in all
material respects, in conformity with the applicable financial
reporting framework.
---------------------------------------------------------------------------

    Some commenters suggested that the standard should retain the
requirement in AU sec. 380 for the auditor to discuss with the audit
committee the auditor's views about the clarity and completeness of the
company's financial statements and disclosures. However, commenters on
the original proposed standard indicated it was not clear what was
meant by the clarity and completeness of the company's financial
statements and related disclosures. Commenters also expressed concern
as to what should be included in the communications to the audit
committee. The communication requirement in Auditing Standard No. 16
avoids possible confusion 0regarding the meaning of the phrase
``clarity and completeness'' by linking it to the auditor performance
requirements included in Auditing Standard No. 14 for the auditor to
evaluate the presentation of the financial statements, including
disclosures. The performance requirements in Auditing Standard No. 14
\103\ provide context regarding the matters to be communicated under
Auditing Standard No. 16.
---------------------------------------------------------------------------

    \103\ Id.
---------------------------------------------------------------------------

New Accounting Pronouncements (Paragraph 13.f. of Auditing Standard No.
16)
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee situations in which, as a result of the auditor's
procedures, the auditor identified a concern regarding management's
anticipated application of accounting pronouncements that have been
issued but are not yet effective and might have a significant effect on
future financial reporting. This requirement is based on the situations
in which, as a result of the auditor's procedures, the auditor has
identified a concern regarding the anticipated application of a new
accounting pronouncement. Auditing Standard No. 16 does not require the
auditor to perform additional procedures to identify such concerns.
    Some commenters noted that management generally discloses in the
financial statements the potential effects of adoption of new
accounting standards and that this auditor communication to the audit
committee should be related to the auditor's evaluation of management's
disclosures related to new accounting pronouncements. The intent of the
required communication to the audit committee is not meant to provide
an additional evaluation of management's disclosures. Rather, the
intent is to inform the audit committee when the auditor ``has
identified a concern'' regarding the planned implementation of a new
accounting pronouncement or

whether management has devoted adequate resources to prepare its
accounting and disclosure processes, and other financial reporting
systems, for the timely implementation of the new accounting
pronouncement. This communication might inform the audit committee's
oversight of the company's financial reporting process. Requiring the
discussion of such matters is intended to allow the audit committee to
properly consider the auditor's concerns regarding future financial
statements. Accordingly, no change to the standard was made.
Alternative Accounting Treatments (Paragraph 13.g. of Auditing Standard
No. 16)
    Auditing Standard No. 16 requires the auditor to communicate all
alternative treatments permissible under the applicable financial
reporting framework for policies and practices related to material
items that have been discussed with management, including the
ramifications of the use of such alternative disclosures and
treatments, and the treatment preferred by the auditor. This
requirement is consistent with Section 10A(k) of the Exchange Act and
with SEC Rule 2-07, which requires the auditor to report to the audit
committee all alternative treatments that are related to material
items, were discussed with management, and are permissible under the
applicable financial reporting framework.\104\
---------------------------------------------------------------------------

    \104\ See SEC Rule 2-07, Section 10A(k) of the Exchange Act, 15
U.S.C. 78j-1(k), and Securities Act Release No. 8183.
---------------------------------------------------------------------------

Other Information in Documents Containing Audited Financial Statements
(Paragraph 14 of Auditing Standard No. 16)
    Auditing Standard No. 16 retains the requirement from AU sec.
380.12 for the auditor to communicate to the audit committee the
auditor's responsibility under PCAOB rules and standards for other
information presented in documents containing audited financial
statements, any related procedures performed, and the results of such
procedures. Such other information would include documents described in
AU sec. 550, AU sec. 558, Required Supplementary Information, and AU
sec. 711, Filings Under Federal Securities Statutes.
    The auditor's responsibility under AU sec. 550 requires the auditor
to read the other information and consider whether such information, or
the manner of its presentation, is materially inconsistent with
information, or the manner of its presentation, in the financial
statements.\105\ One commenter suggested that Auditing Standard No. 16
should also include a requirement to communicate any identified
material inconsistencies or misstatements of facts, including the
auditor's response to such matters.
---------------------------------------------------------------------------

    \105\ See generally, AU secs. 550.04-.07, which require that the
auditor read the information and consider whether it is materially
inconsistent with information in the financial statements or whether
it contains any material misstatements of fact.
---------------------------------------------------------------------------

    Auditing Standard No. 16 requires the auditor to communicate the
results of the auditor's procedures related to other information in
documents containing audited financial statements, which would require
the auditor to communicate identified inconsistencies or misstatements
of facts to the audit committee. The Board is amending AU sec. 550 to
require the auditor to communicate to the audit committee the material
inconsistency between the other information and the financial
statements in situations in which the information is not revised to
eliminate the material inconsistency. The Board also is amending AU
sec. 550 to require the auditor to communicate to the client and the
audit committee, in writing, a material misstatement of fact in the
other information. Thus, it was not necessary to revise the standard in
response to commenters.
Difficult or Contentious Matters for Which the Auditor Consulted
(Paragraph 15 of Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee matters that are difficult or contentious for which the
auditor consulted outside the engagement team and that the auditor
reasonably determined are relevant to the audit committee's oversight
of the financial reporting process. The required communications of
difficult or contentious matters are based on the results of the
procedures the auditor performed regarding such matters during the
course of the audit and do not require the performance of new or
additional procedures.
    Many matters that arise during an audit can be complex or unusual,
and the auditor might consult on such matters with the firm's national
office, industry specialists, or external parties. Difficult or
contentious issues can arise in various stages of the audit, including
in the auditor's evaluation of management's judgments, estimates,
accounting policies, or assessment of identified control deficiencies.
Difficult or contentious issues generally are the critical matters that
concern the auditor when he or she is making the final assessment of
whether the financial statements are presented fairly.
    A difficult issue might not always be synonymous with a contentious
issue. Rather, a difficult issue might be a matter that requires
consultation. A contentious issue might be a matter that not only
requires consultation but also leads to significant points of
disagreement, debate, or deliberation between the auditor and
management. Audit committees might better appreciate the importance of
difficult or contentious matters if they are aware that such
consultations took place.
    During the course of the audit difficult or contentious issues
might arise for which the auditor did not consult, but which the
auditor believes are relevant to the audit committee's oversight of the
financial reporting process. Auditing Standard No. 16 does not preclude
the auditor from communicating to the audit committee difficult or
contentious matters for which the auditor did not consult outside the
engagement team.
    Some commenters suggested that the standard should define difficult
or contentious matters. The term ``difficult or contentious matter'' is
used in Auditing Standard No. 7, Engagement Quality Review. Therefore,
the term ``difficult or contentious matter'' is not defined in this
standard.
    Some commenters suggested that the standard should exclude the
discussions between the auditor and the engagement quality reviewer
from communications to the audit committee regarding consultation
outside the engagement team on difficult or contentious matters. The
communication to the audit committee in Auditing Standard No. 16
focuses on the difficult or contentious matters on which the auditor
consulted, not on the parties involved in the consultation. Therefore,
the standard was not revised.
Management Consultation With Other Accountants (Paragraph 16 of
Auditing Standard No. 16)
    When the auditor is aware that management consulted with other
accountants about significant auditing or accounting matters and the
auditor has identified a concern regarding such matters, Auditing
Standard No. 16 requires the auditor to communicate to the audit
committee the auditor's views about such matters that were the subject
of such consultation. This requirement is similar to a requirement in
AU sec. 380.\106\ Communicating matters that

were the subject of consultations only when the auditor has identified
a concern about those matters should allow the audit committee to focus
its efforts on important accounting and auditing issues.
---------------------------------------------------------------------------

    \106\ AU sec. 380.14.
---------------------------------------------------------------------------

    Some commenters suggested that communicating management
consultations with other accountants should be management's
responsibility and that the standard should clarify that the auditor
should comment only on what management has communicated regarding such
consultations. The standard does not impose a communication requirement
on management. The requirement in Auditing Standard No. 16 is
specifically related to the auditor's responsibilities when management
has consulted with other accountants and only when the auditor has a
concern regarding the accounting and auditing matters that were the
subject of management's consultations. Therefore, Auditing Standard No.
16 was not revised.
    As part of the comment process, the Board asked whether the
requirement to communicate about consultations should be expanded to
include consultations on accounting or auditing matters with non-
accountants, such as consulting firms or law firms. Some commenters
suggested that communication regarding management's consultations with
non-accountants should be required, while others suggested that
communication about these consultations should be made at the auditor's
discretion depending on the facts or circumstances and the significance
of the consultation to the financial statements. However, many
commenters indicated that this communication should not be expanded to
include consultations with non-accountants, as the auditors would not
be in position to know about all management consultations with non-
accountants. Some commenters indicated that this requirement could
result in the auditor expending significant effort to identify and
evaluate management's consultations with non-accountants. After
consideration of these comments, the standard was not revised to
require the auditor to communicate management's consultation with non-
accountants.
Going Concern (Paragraph 17 of Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee certain matters related to the auditor's evaluation of
the company's ability to continue as a going concern. The communication
requirements in Auditing Standard No. 16 are based on the auditor's
performance requirements under AU sec. 341, The Auditor's Consideration
of an Entity's Ability to Continue as a Going Concern, which requires
the auditor to evaluate whether there is substantial doubt about the
company's ability to continue as a going concern for a reasonable
period of time.\107\ The auditor's communication to the audit committee
regarding the auditor's evaluation of the company's ability to continue
as a going concern can serve to further inform the audit committee, in
certain circumstances, regarding difficult conditions and events that
the company is encountering.
---------------------------------------------------------------------------

    \107\ See AU sec. 341.06, which provides examples of such
conditions and events and AU sec. 341.07, which discusses the
auditor's procedures if the auditor believes there is substantial
doubt about the company's ability to continue as a going concern for
a reasonable period of time.
---------------------------------------------------------------------------

    Auditing Standard No. 16 requires the auditor to communicate the
conditions and events the auditor identified that, when considered in
the aggregate, lead the auditor to believe that there is substantial
doubt about the company's ability to continue as a going concern for a
reasonable period of time. Information about such conditions and events
is obtained from the application of auditing procedures planned and
performed to achieve audit objectives that are related to management's
assertions in the financial statements.\108\ Examples of such
conditions and events include, but are not limited to, negative trends,
other indications of possible financial difficulties, internal matters,
or external matters that have occurred.\109\
---------------------------------------------------------------------------

    \108\ See AU sec. 341.02.
    \109\ See AU sec. 341.06, which provides examples of such
conditions and events.
---------------------------------------------------------------------------

    Under AU sec. 341, if after considering the identified conditions
and events, in the aggregate, the auditor believes that there is
substantial doubt about the entity's ability to continue as a going
concern for a reasonable period of time, the auditor should consider
management's plans for dealing with the adverse effects of the
conditions and events.\110\ Additionally, the auditor should obtain
information about the plans and consider whether it is likely that the
adverse effects will be mitigated for a reasonable period of time, and
that such plans can be effectively implemented.\111\ Auditing Standard
No. 16 requires that if the auditor concludes, after consideration of
management's plans, that substantial doubt about the company's ability
to continue as a going concern is alleviated, the auditor should
communicate to the audit committee the basis for the auditor's
conclusion, including elements the auditor identified within
management's plans that are significant to overcoming the adverse
effects of the conditions and events.\112\
---------------------------------------------------------------------------

    \110\ See AU sec. 341.07, which discusses the auditor's
procedures if the auditor believes there is substantial doubt about
the company's ability to continue as a going concern for a
reasonable period of time.
    \111\ See AU sec. 341.03b.
    \112\ See AU sec. 341.08, which discusses the auditor's
responsibilities related to the auditor's evaluation of management's
plans.
---------------------------------------------------------------------------

    Under AU sec. 341, if the auditor concludes that substantial doubt
about the company's ability to continue as a going concern for a
reasonable period of time remains, the audit report should include an
explanatory paragraph to reflect the auditor's conclusion that there is
substantial doubt about the company's ability to continue as a going
concern for a reasonable period of time.\113\ Additionally, Auditing
Standard No. 16 requires that if the auditor concludes that substantial
doubt about the company's ability to continue as a going concern for a
reasonable period of time remains,\114\ the auditor should communicate
to the audit committee: (1) The effects, if any, on the financial
statements and the adequacy of the related disclosure; \115\ and (2)
the effects on the auditor's report.\116\
---------------------------------------------------------------------------

    \113\ See AU sec. 341.12.
    \114\ See AU sec. 341.03c, which discusses the auditor's
evaluation of factors that indicate there is substantial doubt about
the company's ability to continue as a going concern.
    \115\ See AU sec. 341.10, which discusses the possible effects
on the financial statements and the adequacy of the related
disclosure.
    \116\ See AU secs. 341.12-.16, which discuss the auditor's
consideration of the effects on the auditor's report when the
auditor concludes that substantial doubt exists about the company's
ability to continue as a going concern for a reasonable period of
time.
---------------------------------------------------------------------------

    The reproposed standard required the auditor to communicate the
conditions and events the auditor identified that, when considered in
the aggregate, indicate that there ``could be'' substantial doubt about
the company's ability to continue as a going concern for a reasonable
period of time. Some commenters suggested that the threshold for
communication to the audit committee should be when the auditor
believes there ``is'' substantial doubt about the company's ability to
continue as a going concern, rather than when there ``could be''
substantial doubt. Those commenters suggested that threshold because,
under AU sec. 341, the auditor is required to consider management's
plans for addressing the adverse effects of the events and conditions
when the auditor believes there ``is'' substantial doubt.
    Auditing Standard No. 16 was revised to require the threshold for
the auditor's

initial communication to the audit committee to be when the auditor
``believes there is'' substantial doubt about the company's ability to
continue as a going concern. This aligns more closely the communication
requirement about the conditions and events with the other
communication requirements in paragraph 17 of Auditing Standard No. 16.
Under paragraph 17 of Auditing Standard No. 16 the auditor is required
to communicate conditions and events, along with the auditor's
conclusion regarding whether either management's plans alleviate the
adverse effects of the conditions and events (item b) or substantial
doubt remains (item c).
Uncorrected and Corrected Misstatements (Paragraphs 18-19 of Auditing
Standard No. 16)
    Auditing Standard No. 16 requires the auditor to provide the audit
committee with the schedule of uncorrected misstatements\117\ relating
to accounts and disclosures that was presented to management. Several
commenters indicated that audit committees would not find value in
information presented at the same level of detail as presented to
management, and that the auditor, therefore, should provide a summary
of misstatements to the audit committee.
---------------------------------------------------------------------------

    \117\ Footnote 13 to paragraph 20 of Auditing Standard No. 14
indicates that misstatements include both omissions and the
presentation of inaccurate or incomplete disclosures.
---------------------------------------------------------------------------

    The Board decided to retain the requirement because presenting a
schedule that shows only a summary of the uncorrected misstatements
rather than the individual misstatements might not be informative for
the audit committee. In addition, the requirement in Auditing Standard
No. 16 is not a significant change from AU sec. 380.10, which required
the presentation to the audit committee of a schedule of uncorrected
misstatements.
    The schedule of uncorrected misstatements required by Auditing
Standard No. 16 is similar to the summary of uncorrected misstatements
included in or attached to the management representation letter.\118\
Additionally, the Exchange Act and SEC Rule 2-07 require the auditor to
provide to the audit committee other material written communications
between the auditor and management, which would include the schedule of
unadjusted audit differences and a listing of adjustments and
reclassifications not recorded, if any.\119\
---------------------------------------------------------------------------

    \118\ See paragraph .06g of AU sec. 333, Management
Representation.
    \119\ See Section 10A(k)(3) of the Exchange Act, 15 U.S.C. 78j-
1(k)(3), SEC Rule 2-07(a)(3) and Securities Act Release No. 8183.
---------------------------------------------------------------------------

    Auditing Standard No. 14 requires the auditor to accumulate
misstatements identified during the audit, other than those that are
clearly trivial, and to communicate those to management on a timely
basis.\120\ According to Auditing Standard No. 14, a misstatement may
relate to a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and
the amount, classification, presentation, or disclosure that should be
reported in conformity with the applicable financial reporting
framework.\121\ The requirement in Auditing Standard No. 16 to
communicate misstatements related to accounts and disclosures relates
only to those misstatements that the auditor has accumulated throughout
the audit that are not clearly trivial and have been reported to
management.
---------------------------------------------------------------------------

    \120\ See paragraphs 10 and 15 of Auditing Standard No. 14.
    \121\ See paragraph A2 of Auditing Standard No. 14.
---------------------------------------------------------------------------

    Auditing Standard No. 16 also requires the auditor to discuss with
the audit committee, or determine that management has adequately
discussed with the audit committee, the basis for the determination
that the uncorrected misstatements were immaterial, including the
qualitative factors\122\ considered. In addition, the auditor also
should communicate to the audit committee that uncorrected
misstatements or matters underlying those uncorrected misstatements
could potentially cause future-period financial statements to be
materially misstated, even if the auditor has concluded that the
uncorrected misstatements are immaterial to the financial statements
under audit.
---------------------------------------------------------------------------

    \122\ See Appendix B of Auditing Standard No. 14, which
discusses the qualitative factors related to the evaluation of the
materiality of uncorrected misstatements.
---------------------------------------------------------------------------

    Auditing Standard No. 16 also requires the auditor to communicate
those corrected misstatements, other than those that are clearly
trivial, related to accounts and disclosures that might not have been
detected except through the auditing procedures performed and discuss
with the audit committee the implications that such corrected
misstatements might have on the financial reporting process.
    One commenter suggested that the standard should require the
auditor to communicate management's adjusting entries recorded at the
end of the period or other entries to reconcile accounts. The release
accompanying the original proposed standard included a question that
asked whether all corrected misstatements, including those detected by
management, should be communicated to the audit committee. Many
commenters responding to the question were not supportive of the
auditor communicating misstatements detected by management or
management's period-end adjusting entries, because the auditor may not
have knowledge of all such adjustments due to the nature of a company's
financial statement close process and the timing of the auditor's
procedures. Commenters suggested that such a requirement would likely
result in the auditor expending significant effort to identify
misstatements or adjusting entries that the company's internal controls
previously identified in the financial close process. Accordingly, the
standard does not include a requirement for the auditor to communicate
misstatements detected by management.
    Some commenters suggested that the standard should be revised to
require the auditor to communicate only corrected misstatements that
individually or in the aggregate could be significant to the company's
financial statements. As noted previously, Auditing Standard No. 14
requires the auditor to accumulate misstatements identified during the
audit, other than those that are clearly trivial. The misstatements the
auditor accumulated and management corrected are those that are other
than clearly trivial and could be significant to the company's
financial statements, either quantitatively or qualitatively. Auditing
Standard No. 16 also requires the auditor to communicate those
corrected misstatements that might not have been detected except
through the auditing procedures performed. The intent of this
requirement is to inform the audit committee of misstatements, which
might have certain implications on the company's financial reporting
process, that were detected only through audit procedures. Therefore,
Auditing Standard No. 16 was not revised.
    Another commenter suggested that the standard should specifically
require the auditor to request management to correct the uncorrected
misstatements. The Board did not make this change because management
has its own legal responsibilities in relation to the preparation and
maintenance of the company's books, records, and financial statements.
Section 13(i) of the Exchange Act requires the financial statements
filed with the SEC to reflect all material correcting adjustments
identified by the auditor.\123\
---------------------------------------------------------------------------

    \123\ Section 13(i) of the Exchange Act, 15 U.S.C. 78j-1(m)(i).

---------------------------------------------------------------------------

Material Written Communication (Paragraph 20 of Auditing Standard No.
16)
    Auditing Standard No. 16 incorporates the Exchange Act's
requirement for the auditor to communicate other material written
communications between the auditor and management to the audit
committee.\124\ This requirement is intended to capture other possible
material written communications that might occur but are not addressed
by requirements in the standard or by other PCAOB standards, such as
the management representation letter.\125\
---------------------------------------------------------------------------

    \124\ Section 10A(k)(3) of the Exchange Act, 15 U.S.C. 78j-
1(k)(3), requires the auditor to report this information to the
audit committee; see also SEC Rule 2-07.
    \125\ See Securities Act Release No. 8183 for a discussion of
the substance of other material written communications.
---------------------------------------------------------------------------

Departure From the Auditor's Standard Report (Paragraph 21 of Auditing
Standard No. 16)
    Auditing Standard No. 16 includes a requirement for the auditor to
communicate to the audit committee when the auditor expects to modify
the opinion in the auditor's report or include explanatory language or
an explanatory paragraph in the auditor's report.\126\ The auditor is
required to communicate the reasons for and the wording of the
modification, explanatory language, or explanatory paragraph. The
requirement is intended to provide the basis for a discussion between
the auditor and the audit committee in those circumstances in which the
auditor expects to add explanatory language or modify the opinion in
the auditor's standard report.
---------------------------------------------------------------------------

    \126\ See paragraphs .11-.74 and .76 of AU sec. 508, Reports on
Audited Financial Statements.
---------------------------------------------------------------------------

    As part of overseeing the audit and the financial reporting
process, it might be important for the audit committee to understand
the reasons an auditor adds explanatory language or modifies the
opinion in the auditor's standard report. Such communication enables
the audit committee to be aware of the nature of any specific matters
that the auditor expects to highlight in the auditor's report. In
addition, these communications provide the audit committee with an
opportunity to obtain further clarification from the auditor about the
modification. This communication also provides the audit committee with
an opportunity to provide the auditor with further information and
explanations regarding the matters that are expected to be included in
the auditor's report.
Disagreements With Management (Paragraph 22 of Auditing Standard No.
16)
    Auditing Standard No. 16 includes a requirement for the auditor to
communicate to the audit committee any disagreements with management
about matters, whether or not satisfactorily resolved, that
individually or in the aggregate could be significant to the company's
financial statements or the auditor's report. This requirement is
retained from AU sec. 380.13.
    Examples of disagreements might include disagreements with
management about the application of accounting principles to the
company's specific transactions and events and the basis for
management's judgments about accounting estimates. Disagreements might
also arise regarding the scope of the audit, disclosures to be made in
the company's financial statements, or the wording of the auditor's
report. For purposes of Auditing Standard No. 16, disagreements do not
include differences of opinion based on incomplete facts or preliminary
information that are later resolved by the auditor obtaining
additional, relevant facts or information prior to the issuance of the
auditor's report.
    One commenter suggested that disagreements that are satisfactorily
resolved should not be communicated to the audit committee unless the
auditor determines that these matters warrant the audit committee's
attention. As noted previously, this communication requirement is not
new. As part of conducting the oversight of the audit and the financial
reporting process, it might be important for the audit committee to
know the areas of tension between the auditor and management regarding
matters that could be significant to the company's financial
statements, such as accounting principles and practices, financial
statement disclosures, auditing scope or procedures, or similar
matters. Accordingly, no change was made in response to this comment.
Additionally, SEC Form 8-K requires that a registrant report certain
disagreements between management and the auditor, whether or not such
disagreements are satisfactorily resolved, when there is a change in
the auditor.\127\ The requirement in Auditing Standard No. 16 provides
the audit committee with information regarding important matters that
might need to be reported subsequently in an SEC filing.
---------------------------------------------------------------------------

    \127\ See e.g., Exchange Act Form 8-K, Item 4.01. See also Item
304(a)(1)(iv) of Regulation S-K, 17 CFR Sec.  229.304(a)(1)(iv), and
Instructions 4 and 5 to that item, which require disclosure of
disagreements, or differences of opinion, at the ``decision-making
level,'' that, if not resolved to the auditor's satisfaction, would
have caused the auditor to make reference to the subject matter of
the disagreement in connection with his or her report.
---------------------------------------------------------------------------

Difficulties Encountered in Performing the Audit (Paragraph 23 of
Auditing Standard No. 16)
    Auditing Standard No. 16 includes the requirement from AU sec.
380.16 for the auditor to communicate to the audit committee any
significant difficulties encountered during the audit. Significant
difficulties encountered during the audit include, but are not limited
to:
    d. Significant delays by management, the unavailability of company
personnel, or an unwillingness by management to provide information
needed for the auditor to perform his or her audit procedures;
    e. An unreasonably brief time within which to complete the audit;
    f. Unexpected extensive effort required by the auditor to obtain
sufficient appropriate audit evidence;
    g. Unreasonable management restrictions encountered by the auditor
on the conduct of the audit; and
    h. Management's unwillingness to make or extend its assessment of
the company's ability to continue as a going concern when requested by
the auditor.
Other Matters (Paragraph 24 of Auditing Standard No. 16)
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee other matters arising from the audit that are
significant to the oversight of the company's financial reporting
process. This communication includes, among other matters, complaints
or concerns regarding accounting or auditing matters that have come to
the auditor's attention during the audit and the results of the
auditor's procedures regarding such matters. Communication of the other
matters is based on the results of audit procedures or the conduct of
the audit and does not require the auditor to perform new or additional
procedures beyond the communication itself.
    The Sarbanes-Oxley Act requires that audit committees of listed
companies establish procedures for the receipt, retention, and
treatment of complaints received by the company regarding accounting,
internal accounting control, or auditing matters, and for the
confidential, anonymous submission by employees of the company of
concerns

regarding questionable accounting or auditing matters.\128\
---------------------------------------------------------------------------

    \128\ See Section 301 of the Sarbanes-Oxley Act, and Section
10A(m)(4) of the Exchange Act, 15 U.S.C. 78j-1(m)(4).
---------------------------------------------------------------------------

    Auditing Standard No. 12 requires the auditor to inquire of the
audit committee regarding tips or complaints received by the audit
committee regarding financial reporting matters. The auditor might
become aware of complaints or concerns regarding financial reporting
matters that were not received through the audit committee's process,
and, therefore, are unknown to the audit committee. The audit committee
might be better able to exercise its oversight activities if the
auditor informed the audit committee of these matters. Paragraph 24 of
Auditing Standard No. 16 requires the auditor to communicate these
matters to the audit committee.
    AU sec. 380 required the auditor to ensure that the audit committee
receives additional information regarding the scope and results of the
audit that may assist the audit committee in overseeing the financial
reporting and disclosure process. Auditing Standard No. 16 enhances the
requirement in AU sec. 380 for the auditor to communicate to the audit
committee the results of the audit procedures regarding the accounting
or auditing matters that have been the subject of complaints or
concerns.
    The standard acknowledges that there might be other matters known
to the auditor that may be beneficial to the audit committee's
oversight of the financial reporting process. This communication could
provide the audit committee with an opportunity to better understand
management's intentions regarding such matters.
    Several commenters suggested that Auditing Standard No. 16 should
require the auditor to communicate to the audit committee the results
of PCAOB inspection findings and any necessary remediation by the audit
firm. With respect to inspections, the Sarbanes-Oxley Act restricts
what the Board may publicly disclose,\129\ and the Sarbanes-Oxley Act
makes no exception for disclosure to an audit committee even if a Board
inspection has reviewed an audit of the financial statements overseen
by that audit committee. The Board cannot compel a firm to disclose
nonpublic inspection information to an audit committee. This need not
prevent an audit committee from discussing inspection results with its
auditor. The Board encourages firms to communicate effectively with
audit committees about inspection matters. The Sarbanes-Oxley Act does
not restrict a firm from disclosing to an audit committee nonpublic
information regarding PCAOB inspections (including quality control
deficiencies and the firm's remediation of those deficiencies) or PCAOB
disciplinary matters.\130\
---------------------------------------------------------------------------

    \129\ See Section 104(g)(2) of the Sarbanes-Oxley Act (providing
that the Board shall make inspection reports available to the public
in appropriate detail ``subject to,'' among other things, the broad
disclosure restrictions of Section 105(b)(5)(A)).
    \130\ See Information for Audit Committees About the PCAOB
Inspection Process, PCAOB Release No. 2012-003 (Aug. 1, 2012).
---------------------------------------------------------------------------

Form and Documentation of Communications (Paragraph 25 of Auditing
Standard No. 16)
    Auditing Standard No. 16 retains from AU sec. 380 the ability for
auditors to communicate to the audit committee either orally or in
writing, unless otherwise specified in the standard. Some commenters
suggested that the standard should require all communications to be in
writing, while other commenters indicated that the standard should
continue to provide flexibility in the manner of communication.
    Auditing Standard No. 16 was not revised to require all
communications to be in writing. The Board's intention is to promote
effective two-way communication between the auditor and the audit
committee, whether through presentations, written reports, or
interactive discussions. Written communications might provide the
auditor with a basis to lead an active two-way discussion with the
audit committee.
    In addition, the form of communication may depend on the nature of
the matter to be communicated. For example, written information often
makes it easier for the audit committee to understand highly complex
information (for example, information about critical accounting
estimates). However, having a dialogue on key matters often is an
important factor in effective communications between the auditor and
the audit committee.
    Auditing Standard No. 16 also requires the auditor to document the
communications in the work papers, whether such communication took
place orally or in writing. The standard further requires the auditor
to include a copy of or a summary of management's communications
provided to the audit committee in the audit documentation if, as part
of its communications to the audit committee, management communicated
some or all of the matters identified in paragraphs 12 or 18 and, as a
result, the auditor did not communicate these matters at the same level
of detail as management.
Timing (Paragraph 26 of Auditing Standard No. 16)
    The Board considers communications with audit committees to be an
integral part of the audit process. AU sec. 380 stated that audit
committee communications are incidental to the audit and are not
required to occur before the issuance of the auditor's report on the
entity's financial statements so long as the communications occur on a
timely basis.\131\ Auditing Standard No. 16 requires the auditor to
communicate the matters required by the standard in a timely manner and
prior to the issuance of the auditor's report. This requirement aligns
the timing of communications with SEC Rule 2-07, which requires the
auditor to communicate matters to the audit committee prior to the
filing of the auditor's report with the SEC.\132\ The appropriate
timing of a particular communication to the audit committee depends on
factors such as the significance of the matters to be communicated and
corrective or follow-up actions needed, unless other timing
requirements are specified by PCAOB rules or standards or the
securities laws.
---------------------------------------------------------------------------

    \131\ AU sec. 380.04.
    \132\ See SEC Rule 2-07.
---------------------------------------------------------------------------

    The reproposed standard specified that all communications be made
in a timely manner and prior to the issuance of the auditor's report,
unless other timing requirements are specified by PCAOB rules or
standards or the rules or regulations of the SEC. One commenter
suggested that the ``rules and regulations of the SEC'' should be
modified to the ``federal securities laws,'' since timing of certain
communications to the audit committee also is specified in securities
laws. The standard was updated to reference ``securities laws.'' \133\
---------------------------------------------------------------------------

    \133\ The term ``securities laws'' is defined in section
2(a)(15) of the Sarbanes-Oxley Act, 15 U.S.C. 7201, to mean the
provisions of law referred to section 3(a)(47) of the Exchange Act,
15 U.S.C. 78c(a)(47), as amended by the Sarbanes-Oxley Act, and
includes the rules, regulations, and orders issued by the SEC
thereunder.
---------------------------------------------------------------------------

    Commenters generally agreed that audit committee communications
should occur in a timely manner and prior to the issuance of the
auditor's report. Some commenters suggested that the standard should
specify the timing of the communication about certain matters, such as
during planning or prior to the earnings release.
    Auditing Standard No. 16 does not emphasize the specific timing of
certain

communications because the appropriate timing might vary depending on
the circumstances. As noted in the standard, the appropriate timing of
a particular communication to the audit committee depends on factors
such as the significance of the matters to be communicated and any
corrective or follow-up action needed, unless other timing requirements
are specified by PCAOB rules or standards or the securities laws.
However, in all events, the timing of the communication should be prior
to the issuance of the auditor's report.
    Providing communications required by Auditing Standard No. 16 to
the audit committee in a timely manner and prior to the issuance of the
auditor's report will allow the audit committee and the auditor the
opportunity to take any action they may deem appropriate to address the
matters communicated prior to the issuance of the auditor's report.
    The reproposed standard noted that an auditor may communicate to
only the audit committee chair if done in order to communicate matters
in a timely manner during the audit; however, the auditor should
communicate such matters to the full audit committee prior to the
issuance of the auditor's report. Several commenters suggested that the
auditor's responsibility to subsequently communicate to the ``full''
audit committee was an unnecessary burden and that the word ``full''
should be deleted to allow the auditor to communicate to the audit
committee when a quorum is present. The standard was revised
accordingly to eliminate the word ``full.''
Adequacy of the Two-Way Communication Process
    The original proposed standard included a requirement for the
auditor to evaluate whether the two-way communication between the
auditor and the audit committee was adequate to support the objectives
of the audit. The requirement was included to emphasize that effective
two-way communication is beneficial to achieving the objectives of the
audit.
    Many commenters on the original proposed standard noted that an
evaluation of the adequacy of the two-way communications can only be
effective if both parties are involved in the evaluation. These
commenters also suggested that if only the auditor evaluates the
effectiveness based on his or her understanding of what was
communicated, that evaluation would not provide information about the
audit committee's understanding of that communication. In response to
commenters, the Board removed this requirement in the reproposed
standard.
    Some commenters on the reproposed standard indicated that the Board
should reinstate the requirement for the auditor to evaluate the
adequacy of the two-way communication between the auditor and the audit
committee to encourage the auditor to determine whether there is
effective two-way communication. Additionally, some commenters
suggested that the standard should be revised to change certain
requirements for the auditor to communicate ``with'' the audit
committee instead of ``to'' the audit committee in situations in which
two-way discussion would be appropriate for the auditor to obtain
information on particular matters relevant to the audit.
    The note in paragraph 3 of Auditing Standard No. 16 states that the
requirement for the auditor to ``communicate to'' the audit committee
is meant to encourage effective two-way communication between the
auditor and the audit committee throughout the audit to assist in
understanding matters relevant to the audit. The importance of
effective two-way communications remains in the standard; therefore, no
change was considered necessary.
    In addition, as part of understanding the company's control
environment in Auditing Standard No. 12, the auditor assesses whether
the board or audit committee understands and exercises oversight
responsibility over financial reporting and internal control.\134\
Other PCAOB standards require that, in an audit of financial
statements, if the auditor becomes aware, or in an integrated audit, if
the auditor concludes that the oversight of the company's external
financial reporting and internal control over financial reporting by
the company's audit committee is ineffective, the auditor must
communicate that information in writing to the board of directors.\135\
Not including a requirement for the auditor to evaluate the adequacy of
a two-way communication in this standard does not change the auditor's
responsibility for assessing the audit committee's effectiveness under
existing PCAOB standards.
---------------------------------------------------------------------------

    \134\ See paragraphs 23-24 of Auditing Standard No. 12.
    \135\ See paragraph 79 of Auditing Standard No. 5 and paragraph
5 of AU sec. 325.
---------------------------------------------------------------------------

Amendments to PCAOB Standards
    With the adoption of Auditing Standard No. 16, the Board adopted
related communication requirements to other PCAOB standards. These
amendments were made to the following standards, among others:
     Auditing Standard No. 5, An Audit of Internal Control Over
Financial Reporting That Is Integrated with An Audit of Financial
Statements;
     AU sec. 316, Consideration of Fraud in a Financial
Statement Audit;
     AU sec. 317, Illegal Acts by Clients;
     AU sec. 550, Other Information in Documents Containing
Audited Financial Statements; and
     AU sec. 722, Interim Financial Information.
    The Board is amending AU sec. 722 to be consistent with Auditing
Standard No. 16. Some commenters suggested that the amendments to AU
sec. 722 should clarify that the accountant (``accountant'' is the term
used in AU sec. 722) is not required to repeat communications that were
made as part of the annual audit. Other commenters suggested that the
amendments to AU sec. 722 should become effective for interim periods
following the first annual period in which Auditing Standard No. 16
becomes effective and that, otherwise, implementing the amendments
prior to the first annual communication under Auditing Standard No. 16
would likely result in unnecessarily expanding the communication
requirements related to the auditor's review of interim information.
    The objective of a review of interim financial information pursuant
to AU sec. 722 is to provide the accountant with a basis for
communicating whether the accountant is aware of any material
modifications that should be made to the interim financial information
for it to conform with generally accepted accounting principles.\136\
Procedures for conducting a review of interim financial information
generally are limited to analytical procedures, inquiries, and other
procedures that address significant accounting and disclosure matters
relating to the interim financial information to be reported.\137\ A
review may bring to the accountant's attention significant matters
affecting the interim financial information, but it does not provide
assurance that the accountant will become aware of all significant
matters that would be identified in an audit.\138\
---------------------------------------------------------------------------

    \136\ AU sec. 722.07.
    \137\ AU sec. 722.15.
    \138\ AU sec. 722.07.
---------------------------------------------------------------------------

    AU sec. 722.18 requires the accountant to make inquiries of members
of management who have responsibility for financial and accounting
matters, including but not limited to, matters concerning unusual

or complex situations that may have an effect on the interim financial
information. Examples of situations about which the accountant would
ordinarily inquire of management include, among other things,
significant, unusual, or infrequently occurring transactions;
application of new accounting principles; changes in accounting
principles or the methods of applying them; and trends and developments
affecting accounting estimates.\139\
---------------------------------------------------------------------------

    \139\ AU sec. 722.55.
---------------------------------------------------------------------------

    An amendment to AU sec. 722 states that when conducting a review of
interim financial information, the accountant also should determine
whether any of the matters described in Auditing Standard No. 16, as
they relate to interim financial information, have been
identified.\140\ This requirement is similar to the current requirement
for the accountant to refer to AU sec. 380 for matters to communicate
to the audit committee when conducting an interim review.\141\
---------------------------------------------------------------------------

    \140\ Amendment to AU sec. 722.34.
    \141\ Id.
---------------------------------------------------------------------------

    Additionally, the amendments to AU sec. 722 recognize that
management might communicate some or all of the matters related to the
company's accounting policies, practices, estimates, and significant
unusual transactions described in paragraph 12 of Auditing Standard No.
16. If management communicates any of these matters, the accountant
does not need to communicate them at the same level of detail as
management, as long as certain criteria are met. However, any omitted
or inadequately described matters should be communicated to the audit
committee.
    The amendment to AU sec. 722.35 also indicates that any
communication the accountant may make about the entity's accounting
policies, practices, estimates, and significant unusual transactions as
applied to its interim financial reporting generally would be limited
to the effect of significant events, transactions, and changes in
accounting estimates that the accountant considered when conducting the
review of interim financial information. The amendments to AU sec. 722
do not require that the communications to the audit committee repeat
the annual communications but, rather, that the communication be
related to the accountant's findings while performing the interim
review procedures.
    The Board determined not to defer the effective date for quarterly
reviews as suggested by some commenters. Deferral of the effective date
would result in AU sec. 380 continuing to apply to communications
relevant to quarterly reviews, while Auditing Standard No. 16
simultaneously would require communications relating to the annual
audit. Auditing Standard No. 16 requires timely communications of
matters in connection with the annual audit to be made throughout the
year under audit. These communications would, therefore, be made at or
near the time that related communications are required in connection
with quarterly reviews. Applying Auditing Standard No. 16 for the
annual audit and AU sec. 380 for quarterly reviews could cause some
degree of complexity because auditors would be required to apply two
different standards when communicating important information to the
audit committee. Therefore, the Board is making Auditing Standard No.
16 effective for quarterly reviews of fiscal years beginning on or
after December 15, 2012.
    In addition to avoiding having two co-existing and differing
standards, implementing Auditing Standard No. 16 in the first quarter
of 2013 should benefit audit committees by providing for the
communication of significant information during the most current
period. Also, and as discussed above, the objective of a review of
interim financial information differs significantly from that of an
audit, and any communication the accountant would make pertaining to
interim financial reporting would be limited, as discussed in AU sec.
722, to matters the accountant considered when conducting the review of
interim financial information.
    The proposed amendments to other PCAOB standards accompanying the
reproposed standard included an amendment to AU sec. 551, Reporting on
Information Accompanying the Basic Financial Statements in Auditor-
Submitted Documents. This amendment would have required the auditor to
communicate to the audit committee material misstatements if the client
did not agree to revise the accompanying information. This amendment
was removed from the amendments accompanying Auditing Standard No. 16
because the Board has proposed to supersede AU sec. 551 as part of its
standard-setting project related to auditing supplemental
information.\142\
---------------------------------------------------------------------------

    \142\ See Proposed Auditing Standard, Auditing Supplemental
Information Accompanying Audited Financial Statements and Related
Amendments to PCAOB Standards. PCAOB Release No. 2011-005 (July 12,
2011).
---------------------------------------------------------------------------

    QC sec. 20, System of Quality Control for a CPA Firm's Accounting
and Auditing Practice, states that to minimize the risk of
misunderstandings regarding the nature, scope, and limitations of
services to be performed, policies and procedures should provide for
obtaining an understanding with the client regarding those
services.\143\ To align with Auditing Standard No. 16, the reproposed
standard proposed an amendment to QC sec. 20 to change ``client'' to
``audit committee.'' One commenter indicated that QC sec. 20 applies to
attest engagements as well as to audit engagements. This commenter
suggested that instead of replacing ``client'' with ``audit
committee,'' a clarifying footnote be added to the word ``client'' to
indicate that with respect to a financial statement audit or an audit
of internal control over financial reporting, the auditor is required
to establish an understanding of the terms of the audit engagement with
the audit committee. The Board considered this comment and decided not
to amend QC sec. 20 at this time. Changes to the Board's quality
control standards will be considered as part of the Board's quality
control standard-setting project.
---------------------------------------------------------------------------

    \143\ QC sec. 20.16.
---------------------------------------------------------------------------

Audits of Brokers and Dealers
    Section 982 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') \144\ gave the Board oversight of
the audits of brokers and dealers registered with the SEC. In September
2010, the Commission issued interpretive guidance clarifying that the
references in Commission rules and staff guidance and in the federal
securities laws to generally accepted auditing standards (``GAAS'') or
to specific standards under GAAS, as they relate to nonissuer brokers
or dealers, should continue to be understood to mean the auditing and
attestation standards established by the American Institute of
Certified Public Accountants (``AICPA''), but noted that it intended to
revisit this interpretation in connection with a SEC rulemaking project
to update the audit and attestation requirements for brokers and
dealers in light of the Dodd-Frank Act.\145\ On June 15, 2011, the SEC
proposed to amend its rules, including SEC Rule 17a-5 under the
Exchange Act, to require, among other things, that audits of brokers'
and dealers' financial statements and examinations of reports regarding
compliance with SEC requirements be

performed in accordance with the standards of the PCAOB.\146\
---------------------------------------------------------------------------

    \144\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \145\ SEC, Commission Guidance Regarding Auditing, Attestation,
and Related Professional Practice Standards Related to Brokers and
Dealers, Exchange Act Release No. 62991 (Sept. 24, 2010).
    \146\ SEC, Broker-Dealer Reports, Exchange Act Release No. 64676
(June 15, 2011).
---------------------------------------------------------------------------

    If the SEC adopts its proposed amendments to SEC Rule 17a-5 or
provides other direction that auditors of brokers and dealers are to
comply with PCAOB professional standards, the Board's auditing,
attestation, quality control, and, where applicable, independence
standards would then apply to audits of brokers and dealers as required
by Section 17 of the Exchange Act and SEC Rule 17a-5.\147\
---------------------------------------------------------------------------

    \147\ 17 CFR 240.17a-5.
---------------------------------------------------------------------------

    Further, if the SEC adopts its proposed amendments to SEC Rule 17a-
5 or provides other direction that auditors of brokers and dealers are
to comply with PCAOB standards, prior to the effective date of Auditing
Standard No. 16,\148\ the Board's interim standard, AU sec. 380, would
be in effect for audits of brokers and dealers conducted for periods
prior to the effective date of Auditing Standard No. 16. The Board's
interim standard, AU sec. 380, which was last amended in 1999,
indicates that it is not applicable to the audit of a broker or dealer
if the broker or dealer does not have an audit committee \149\ or is
registered with the SEC only because of Section 15(a) of the Exchange
Act.\150\ Conversely, the auditor communication requirements under
GAAS, which are contained in Statement on Auditing Standards (``SAS'')
114, The Auditor's Communication With Those Charged With Governance,
which was issued by the Auditing Standards Board (``ASB'') of the AICPA
in 2006, are applicable to audits of all brokers and dealers.\151\
Because of this difference in the applicability of the auditor
communication standards to the audits of brokers and dealers, there
could be a gap in required audit committee communications if the SEC
amendments to SEC Rule 17a-5 are adopted and become effective prior to
the effective date of Auditing Standard No. 16. To eliminate this gap,
the Board is amending AU sec. 380 to delete the current exception for
audits of brokers and dealers that do not have an audit committee or
are registered with the SEC only because of Section 15(a) of the
Exchange Act. The transitional amendment would eliminate the above-
referenced gap in audit committee communications by making the
communication requirements in AU sec. 380 applicable to audits of
issuers and brokers and dealers, as those terms are defined in the
Sarbanes-Oxley Act, prior to the effective date of Auditing Standard
No. 16.
---------------------------------------------------------------------------

    \148\ As noted in this release, the Board anticipates that
Auditing Standard No. 16 will be effective, subject to SEC approval,
for audits of fiscal years beginning on or after December 15, 2012.
    \149\ AU sec. 380.01 states that the communications required by
AU sec. 380 are applicable to entities that either have an audit
committee or that have otherwise formally designated oversight of
the financial reporting process to a group equivalent to an audit
committee (such as a finance committee or budget committee).
    \150\ See AU sec. 380.01, which states that the communications
required by the standard ``are applicable to * * * all Securities
and Exchange Commission (SEC) engagements.'' As noted in footnote 2
to AU sec. 380.01, the audits of brokers and dealers do not fall
within an SEC engagement as defined in AU sec. 380 if the broker or
dealer is registered only because of Section 15(a) of the Exchange
Act.
    \151\ See paragraph 1 of SAS 114 which states ``[t]his statement
* * * establishes standards and provides guidance on the auditor's
communication with those charged with governance in relation to an
audit of financial statements,'' and section 5.129 of the AICPA
Audit & Accounting Guide: Brokers and Dealers in Securities (July
2010), which states, in part: ``AU section 380, The Auditor's
Communication with Those Charged with Governance * * * has been
updated for the issuance of SAS No. 114* * *. AU 380 is applicable
to all broker-dealers being audited under GAAS, regardless of their
governance structure or size.''
---------------------------------------------------------------------------

    If PCAOB standards are applicable to audits of brokers and dealers
prior to the effective date of Auditing Standard No. 16, the
communication requirements under Auditing Standard No. 16 would be
applicable to the audits of brokers and dealers upon the effective date
of the standard.
    The release accompanying the reproposed standard posed a question
about whether the standard should apply to the audits of all brokers
and dealers. Many commenters supported the requirement for the standard
to apply to the audits of all brokers and dealers. However, some
commenters suggested that it may not be practicable to communicate the
matters in the standard because they may not be applicable to all
brokers and dealers due to the varying size and nature of the brokers
and dealers as well as the difference in their governance structures.
Some commenters suggested that these brokers and dealers may not have
an audit committee, board of directors, or equivalent body, or that the
individual designated to oversee the financial reporting process and
audits of the company might be the same person preparing the financial
statements. They suggested, therefore, that the standard should apply
only to certain types of brokers and dealers, such as carrying brokers
or dealers. Other commenters suggested that the standard should not be
applicable to the audits of brokers and dealers.
    The Board acknowledges that there are smaller, less complex brokers
and dealers that do not have an audit committee, board of directors, or
equivalent body, but that communicating matters about the audit and the
financial statements to those overseeing the financial reporting
process is important. The governance structure of brokers and dealers
does not change the value of the information regarding the audit or the
company's financial statements.
    Therefore, as discussed in this release, the definition of audit
committee was revised for audits of nonissuers to recognize that if no
such committee or board of directors (or equivalent body) exists with
respect to the company, the communication should be made to the
person(s) who oversee the accounting and financial reporting processes
of the company and audits of the financial statements of the company.
    The release accompanying the reproposed standard posed a question
about whether there are any communication requirements specific to the
audits of all brokers and dealers that should be added to the standard.
Some commenters suggested that the standard should require additional
communication to the audit committee related to the additional
attestation reporting to be required for brokers and dealers as
proposed in pending SEC amendments to its Rule 17a-5.\152\ Once the
amendments to Rule 17a-5 are adopted in final form, the Board may
consider adding requirements for communication to the audit committee
pertaining to such matters.
---------------------------------------------------------------------------

    \152\ SEC, Commission Guidance Regarding Auditing, Attestation,
and Related Professional Practice Standards Related to Brokers and
Dealers, Exchange Act Release No. 62991 (Sept. 24, 2010).
---------------------------------------------------------------------------

Emerging Growth Companies
    Pursuant to Section 104 of the Jumpstart Our Business Startups Act
(``JOBS Act''), any rules adopted by the Board subsequent to April 5,
2012, do not apply to the audits of EGCs (as defined in Section
3(a)(80) of the Exchange Act) unless the SEC ``determines that the
application of such additional requirements is necessary or appropriate
in the public interest, after considering the protection of investors,
and whether the action will promote efficiency, competition, and
capital formation.'' \153\ Auditing Standard No. 16 is the first
auditing standard adopted by the Board subsequent to enactment of the
JOBS Act and accordingly is subject to a separate determination by the
SEC

regarding its applicability to audits of EGCs.
---------------------------------------------------------------------------

    \153\ Public Law 112-106, 126 STAT. 306 (April 5, 2012). See
Section 103(a)(3)(C) of the Sarbanes-Oxley Act, 15 U.S.C.
7213(a)(3)(C), as added by Section 104 of the JOBS Act.
---------------------------------------------------------------------------

    The Board is also requesting that the Commission approve the
proposed rules, pursuant to Section 103(a)(3)(C) of the Sarbanes-Oxley
Act, for application to audits of EGCs, as that term is defined in
Section 3(a)(80) of the Exchange Act. The Board's request is set forth
in section D.
Effective Date
    The Board anticipates that the transitional amendments to AU sec.
380 will be effective, subject to SEC approval, for the periods that
PCAOB standards become applicable to audits of brokers and dealers, as
designated by the SEC upon adoption of its amendments to SEC Rule 17a-
5, if such periods precede the effective date of Auditing Standard No.
16.
    The Board anticipates that Auditing Standard No. 16 and related
amendments, included will be effective, subject to SEC approval, for
audits of fiscal years beginning on or after December 15, 2012.
Comparison of the Objectives and Requirements of Auditing Standard No.
16, Communications With Audit Committees, to the Analogous Standards of
the International Auditing and Assurance Standards Board and the
Auditing Standards Board of the American Institute of Certified Public
Accountants
    In developing its original proposed standard, the Board took into
account, among other things, the analogous standards of the
International Auditing and Assurance Standards Board (``IAASB'') and
the ASB of the AICPA. The release accompanying the initial proposed
standard and reproposed standard included a comparison of the
objectives and requirements of the initial proposed standard and
reproposed standards to the analogous standards of the IAASB and ASB.
    The following discussion compares certain significant differences
between the objectives and requirements of Auditing Standard No. 16 and
the analogous standards of the IAASB and ASB of the American Institute
of Certified Public Accountants.
    The analogous IAASB standards are:
    3. International Standard on Auditing (``ISA'') 210, Agreeing the
Terms of Audit Engagements, and
    4. ISA 260, Communication with Those Charged with Governance.
    The analogous ASB standards \154\ are:
---------------------------------------------------------------------------

    \154\ In October 2011, the ASB issued Statement on Auditing
Standards (``SAS'') No. 122, Statements on Auditing Standards:
Clarification and Recodification, which contains the Preface to
Codification of Statements on Auditing Standards, Principles
Underlying an Audit Conducted in Accordance with Generally Accepted
Auditing Standards, and 39 clarified SASs. SAS 122 identifies the
section within the AICPA codification with ``AU-C'' section numbers.
See http://www.aicpa.org/RESEARCH/STANDARDS/AUDITATTEST/Pages/audit%20and%20attest%20standards.aspx.
---------------------------------------------------------------------------

    5. AU-C Section 210, Terms of Engagement, and
    6. AU-C Section 260, The Auditor's Communication With Those Charged
with Governance.
    Other standards of the IAASB and the ASB, respectively, were
considered in this comparison to the extent that they include
comparable requirements, including:
    e. ISA 240, The Auditor's Responsibilities Relating to Fraud in an
Audit of Financial Statements,
    f. ISA 450, Evaluation of Misstatements Identified during the
Audit,
    g. ISA 570, Going Concern,
    h. ISA 600, Special Considerations--Audits of Group Financial
Statements (Including the Work of Component Auditors),
    i. ISA 720, The Auditor's Responsibilities Relating to Other
Information in Documents Containing Audited Financial Statements,
    j. AU-C Section 240, Consideration of Fraud in a Financial
Statement Audit,
    k. AU-C Section 450, Evaluation of Misstatements Identified During
the Audit,
    l. AU-C Section 600, Using the Work of Others--Special
Considerations--Audits of Group Financial Statements (Including the
Work of Component Auditors),
    m. SAS 118, Other Information in Documents Containing Audited
Financial Statements, and
    n. SAS 126, The Auditor's Consideration of An Entity's Ability to
Continue as a Going Concern (Redrafted).
    The information presented does not cover the application and
explanatory material in the IAASB standards or ASB standards.\155\
---------------------------------------------------------------------------

    \155\ Paragraph A59 of ISA 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with
International Standards on Auditing, indicates that the application
and other explanatory material section of the ISAs ``does not in
itself impose a requirement,'' but ``is relevant to the proper
application of the requirements of an ISA.'' Paragraph A63 of AU-C
Section 200, Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Generally Accepted Auditing
Standards, states that although application and other explanatory
material ``does not in itself impose a requirement, it is relevant
to the proper application of the requirements of an AU-C section.''
---------------------------------------------------------------------------

    This discussion is provided for informational purposes only. It is
not a summary of or a substitute for Auditing Standard No. 16 itself.
This comparison may not represent the views of the IAASB or ASB
regarding the interpretation of their standards.
Objectives
PCAOB
    Auditing Standard No. 16 supersedes AU sec. 310 and AU sec. 380.
Given the responsibility of many audit committees for the appointment
and retention of the auditor, Auditing Standard No. 16 combines the
requirements from the Board's standards, AU secs. 310 and 380, into one
auditing standard.
    Auditing Standard No. 16 includes four objectives for the auditor,
which reflect both the appointment and retention of the auditor as well
as the overall communication responsibilities. The objectives of the
auditor are to:
    a. Communicate to the audit committee the responsibilities of the
auditor in relation to the audit and establish an understanding of the
terms of the audit engagement with the audit committee;
    b. Obtain information from the audit committee relevant to the
audit;
    c. Communicate to the audit committee an overview of the overall
audit strategy and timing of the audit; and
    d. Provide the audit committee with timely observations arising
from the audit that are significant to the financial reporting process.
IAASB and ASB
    ISA 210 and AU-C Section 210 both include an objective to establish
whether the preconditions for an audit are present. Auditing Standard
No. 16 does not include this objective, because some of the related
requirements in the ISA and SAS are not applicable to audits performed
under PCAOB standards, such as determining whether the financial
reporting framework is acceptable. For audits performed under PCAOB
standards, the auditor should look to the requirements of the
Securities and Exchange Commission for the company under audit with
respect to the accounting principles applicable to that company.
    Both ISA 260 and AU-C Section 260 include an objective for the
auditor to promote effective two-way communication between the auditor
and those charged with governance. Although Auditing Standard No. 16
does not include a similar objective, the standard encourages effective
two-way communication between the auditor and the audit committee. As
stated in Auditing Standard No. 16,

``communicate to,'' is meant to encourage effective two-way
communication between the auditor and the audit committee throughout
the audit to assist in understanding matters relevant to the audit.
Appointment and Retention
Significant Issues Discussed with Management In Connection with the
Auditor's Appointment or Retention
PCAOB
    Auditing Standard No. 16 requires the auditor to discuss with the
audit committee any significant issues that the auditor discussed with
management in connection with the appointment or retention of the
auditor, including significant discussions regarding the application of
accounting principles and auditing standards.
IAASB and ASB
    ISA 210 and AU-C Section 210 do not include a similar requirement.
Establish an Understanding of the Terms of the Audit
PCAOB
    Auditing Standard No. 16 requires the auditor to establish an
understanding of the terms of the audit engagement with the audit
committee. This understanding includes communicating to the audit
committee the objective of the audit, the responsibilities of the
auditor, and the responsibilities of management. Paragraph 6 of
Auditing Standard No. 16 requires the auditor to record the
understanding of the terms in an engagement letter and provide the
engagement letter to the audit committee annually. In addition,
paragraph 6 of Auditing Standard No. 16 includes a requirement for the
auditor to have the engagement letter executed by the appropriate party
or parties on behalf of the company. If the appropriate party or
parties are other than the audit committee, or its chair on behalf of
the audit committee, the auditor should determine that the audit
committee has acknowledged and agreed to the terms of the engagement.
    Additionally, Auditing Standard No. 16 requires the auditor to
decline to accept, continue, or perform the engagement if the auditor
cannot establish an understanding of the terms of the audit engagement
with the audit committee.
IAASB and ASB
    ISA 210 and AU-C Section 210 require the auditor to agree on the
terms of the audit engagement with management and, where appropriate,
those charged with governance.
    ISA 210 and AU-C Section 210 require the engagement letter to be in
writing, although there is no requirement that the engagement letter be
given to the audit committee or that it be signed by the audit
committee, or its chair on behalf of the audit committee, or that it
otherwise be acknowledged by the audit committee. Additionally, ISA 210
states that for recurring audits, the auditor shall assess whether
circumstances require the terms of the audit engagement to be revised
and whether there is a need to remind the entity of the existing terms
of the audit engagement. Accordingly, ISA 210 permits the auditor to
not send a new audit engagement letter or other written agreement each
period.
    AU-C Section 210 requires the auditor to assess whether
circumstances require the terms of the audit engagement to be revised.
If the auditor concludes that the terms of the preceding engagement
need not be revised for the current engagement, the auditor should
remind management of the terms of the engagement, and the reminder
should be documented.
    Both ISA 210 and AU-C Section 210 also establish requirements for
the auditor to determine whether the preconditions for an audit exist.
Auditing Standard No. 16 does not include similar requirements, as
these requirements were either not applicable to audits performed under
PCAOB standards or were addressed through the requirements in Auditing
Standard No. 16 for establishing an understanding of the terms of the
audit engagement with the audit committee.
    ISA 210 requires the auditor to determine whether there are any
conflicts between the financial reporting standards and additional
requirements supplemented by law or regulation. AU-C Section 210 does
not include similar requirements. Auditing Standard No. 16 also does
not include similar requirements as they are not relevant to the audits
performed under PCAOB standards.
    ISA 210 and AU-C Section 210 also include requirements regarding
limitation of scope prior to audit engagement acceptance, other factors
affecting audit engagement acceptance, and acceptance of a change in
the terms of the audit engagement. Auditing Standard No. 16 does not
include such requirements as they are not applicable to audits
performed under PCAOB standards.
    AU-C Section 210 also includes requirements regarding initial
audits and re-audits. Auditing Standard No. 16 does not include similar
requirements, although similar requirements are included in the Board's
standard, AU sec. 315, Communications Between Predecessor and Successor
Auditors.
    Additionally, ISA 260 and AU-C Section 260 include a requirement
for the auditor to communicate with those charged with governance the
form, timing, and expected general content of communications. Auditing
Standard No. 16 does not include this requirement; however, Auditing
Standard No. 16 does not preclude the auditor from communicating these
matters to the audit committee.
Obtaining Information and Communicating the Audit Strategy Obtaining
Information Relevant to the Audit
PCAOB
    Auditing Standard No. 16 requires the auditor to inquire of the
audit committee about whether it is aware of matters relevant to the
audit, including, but not limited to, violations or possible violations
of laws or regulations. This requirement complements the requirement in
Auditing Standard No. 12, Identifying and Assessing Risks of Material
Misstatement, for the auditor to make inquiries of the audit committee,
or equivalent (or its chair) about risks of material misstatement,
including inquiries related to fraud risks.\156\
---------------------------------------------------------------------------

    \156\ Paragraphs 5.f. and 54-57 of Auditing Standard No. 12.
---------------------------------------------------------------------------

IAASB and ASB
    ISA 260 and the AU-C Section 260 do not contain a similar
requirement for the auditor to inquire of matters that might be
relevant to the audit, including, but not limited to, knowledge of
violations or possible violations of laws or regulations. However, ISA
240 and AU-C Section 240 require the auditor to make inquiries of those
charged with governance to determine whether they have knowledge of any
actual, suspected, or alleged fraud affecting the entity.
Overall Audit Strategy, Significant Risks, and Timing of the Audit
PCAOB
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee an overview of the overall audit strategy, including
the timing of the audit, and discuss with the audit committee the
significant risks identified during the auditor's risk assessment
procedures. As part of communicating the overall audit strategy,
paragraph 10 of Auditing Standard No. 16 requires the auditor to
communicate the following matters to the audit committee, if
applicable:

    a. The nature and extent of specialized skill or knowledge needed
to perform the planned audit procedures or evaluate the audit results
related to significant risks;
    b. The extent to which the auditor plans to use the work of the
company's internal auditors in an audit of financial statements;
    c. The extent to which the auditor plans to use the work of
internal auditors, company personnel (in addition to internal
auditors), and third parties working under the direction of management
or the audit committee when performing an audit of internal control
over financial reporting;
    d. The names, locations, and planned responsibilities of other
independent public accounting firms or other persons, who are not
employed by the auditor, that perform audit procedures in the current
period audit; and
    e. The basis for the auditor's determination that the auditor can
serve as principal auditor, if significant parts of the audit are to be
performed by other auditors.
    In addition, Auditing Standard No. 16 requires the auditor to
communicate to the audit committee significant changes to the planned
audit strategy or the significant risks initially identified and the
reasons for such changes.
IAASB and ASB
    ISA 260 and AU-C Section 260 require the auditor to communicate an
overview of the planned scope and timing of the audit. However, ISA 260
and AU-C Section 260 do not require the auditor to communicate
significant changes to the planned scope and timing of the audit.
Further, ISA 260 and AU-C Section 260 do not include requirements for
the auditor to communicate information about specialized skill or
knowledge needed to perform the planned audit procedures or evaluate
the audit results related to significant risks, the auditor's use of
the work of internal auditors, or the auditor's use of the work of
other company personnel and third parties working under the direction
of management or the audit committee.
    ISA 260 and AU-C Section 260 do not include requirements for the
auditor to communicate information about the names, locations, and
planned responsibilities of other independent public accounting firms
or other persons, who are not employed by the auditor, that perform
audit procedures in the current period audit.
    However, ISA 600 and AU-C Section 600, include requirements for the
auditor to communicate certain matters to those charged with governance
including: an overview of the type of work to be performed on the
financial information of the components; an overview of the nature of
the group engagement team's planned involvement in the work to be
performed by the component auditors on the financial information of
significant components; instances where the group engagement team's
evaluation of the work of a component auditor gave rise to a concern
about the quality of that auditor's work; any limitation on the group
audit; and fraud or suspected fraud involving group management,
component management, employees who have significant roles in group-
wide controls or other where the fraud resulted in a material
misstatement of the group financial statements. In addition, AU-C
Section 600 also includes a requirement for the auditor to communicate
the basis for the decision to make reference to the audit of a
component auditor in the auditor's report on the group financial
statements.
Results of the Audit
Accounting Policies and Practices, Estimates, and Significant Unusual
Transactions
PCAOB
    Auditing Standard No. 16 requires the auditor to communicate
certain matters relating to accounting policies and practices,
estimates, and significant unusual transactions. However, Auditing
Standard No. 16 acknowledges that if management communicates matters
related to accounting policies and practices, estimates, and
significant unusual transactions to the audit committee, the auditor
does not need to communicate these matters at the same level of detail
as management as long as the auditor (1) participated in management's
discussion with the audit committee, (2) affirmatively confirmed to the
audit committee that management has adequately communicated these
matters, and (3) with respect to critical accounting policies and
practices, identified for the audit committee those accounting policies
and practices that the auditor considers critical. In addition, the
auditor is required to communicate any omitted or inadequately
described matters to the audit committee.
    Matters to be communicated include:
    a. Significant accounting policies and practices--(1) management's
initial selection of, or changes in, significant accounting policies or
the application of such policies in the current period; and (2) the
effect on financial statements or disclosures of significant accounting
policies in (i) controversial areas or (ii) areas for which there is a
lack of authoritative guidance or consensus, or diversity in practice.
    b. All critical accounting policies and practices to be used,
including: (1) the reasons certain policies and practices are
considered critical; and (2) how current and anticipated future events
might affect the determination of whether certain policies and
practices are considered critical.
    c. Critical accounting estimates--(1) a description of the process
management used to develop critical accounting estimates; (2)
management's significant assumptions used in critical accounting
estimates that have a high degree of subjectivity; and (3) any
significant changes management made to the processes used to develop
critical accounting estimates or significant assumptions, a description
of management's reasons for the changes, and the effects of the changes
on the financial statements.
    d. Significant unusual transactions--(1) significant transactions
that are outside the normal course of business for the company or that
otherwise appear to be unusual due to their timing, size, or nature;
and (2) the policies and practices management used to account for
significant unusual transactions.
IAASB
    ISA 260 requires the auditor to communicate the auditor's views
about significant qualitative aspects of the entity's accounting
practices, including accounting policies, accounting estimates and
financial statement disclosures.
ASB
    AU-C Section 260 requires the auditor to communicate the auditor's
views about qualitative aspects of the entity's significant accounting
practices, including accounting policies, accounting estimates, and
financial statement disclosures. AU-C Section 260 also provides that,
when applicable, the auditor should determine that those charged with
governance are informed about the process used by management in
formulating particularly sensitive accounting estimates, including fair
value estimates, and about the basis for the auditor's conclusions
regarding the reasonableness of those estimates.
    The ISAs and the AU-Cs do not include a similar requirement for
communicating significant unusual transactions.

Auditor's Evaluation of the Quality of the Company's Financial
Reporting
PCAOB
    Auditing Standard No. 16 requires the auditor to communicate the
following matters to the audit committee:
    a. Qualitative aspects of significant accounting policies and
practices.
    (1) The results of the auditor's evaluation of, and conclusions
about, the qualitative aspects of the company's significant accounting
policies and practices, including situations in which the auditor
identified bias in management's judgments about the amounts and
disclosures in the financial statements; and
    (2) The results of the auditor's evaluation of the differences
between (i) estimates best supported by the audit evidence and (ii)
estimates included in the financial statements, which are individually
reasonable, that indicate a possible bias on the part of the company's
management.
    b. Assessment of critical accounting policies and practices. The
auditor's assessment of management's disclosures related to the
critical accounting policies and practices, along with any significant
modifications to the disclosure of those policies and practices
proposed by the auditor that management did not make.
    c. Conclusions regarding critical accounting estimates. The basis
for the auditor's conclusions regarding the reasonableness of the
critical accounting estimates.
    d. Significant unusual transactions. The auditor's understanding of
the business rationale for significant unusual transactions.
    e. Financial statement presentation. The results of the auditor's
evaluation of whether the presentation of the financial statements and
related disclosures are in conformity with the applicable financial
reporting framework, including the auditor's consideration of the form,
arrangement, and content of the financial statements (including the
accompanying notes), encompassing matters such as the terminology used,
the amount of detail given, the classification of items, and the bases
of amounts set forth.
    f. New accounting pronouncements. Situations in which, as a result
of the auditor's procedures, the auditor identified a concern regarding
management's anticipated application of accounting pronouncements that
have been issued but are not yet effective and might have a significant
effect on future financial reporting.
    g. Alternative accounting treatments. All alternative treatments
permissible under the applicable financial reporting framework for
policies and practices related to material items that have been
discussed with management, including the ramifications of the use of
such alternative disclosures and treatments and the treatment preferred
by the auditor.
IAASB
    ISA 260 requires the auditor to communicate the auditor's views
about significant qualitative aspects of the entity's accounting
practices, including accounting policies, accounting estimates, and
financial statement disclosures. The ISA provides that, when
applicable, the auditor shall explain to those charged with governance
why the auditor considers a significant accounting practice, that is
acceptable under the applicable financial reporting framework, not to
be most appropriate to the particular circumstances of the entity.
    The ISAs do not include a similar requirement for communicating the
auditor's understanding of the business rationale for significant
unusual transactions.
ASB
    AU-C Section 260 requires the auditor to communicate the auditor's
views about qualitative aspects of the entity's significant accounting
practices, including accounting policies, accounting estimates, and
financial statement disclosures. When applicable the auditor should:
    a. Explain to those charged with governance why the auditor
considers a significant accounting practice that is acceptable under
the applicable financial reporting framework not to be most appropriate
to the particular circumstances of the entity, and
    b. Determine that those charged with governance are informed about
the process used by management in formulating particularly sensitive
accounting estimates, including fair value estimates, and about the
basis for the auditor's conclusions regarding the reasonableness of
those estimates.
    The AU-Cs do not include a similar requirement for communicating
the auditor's understanding of the business rationale for significant
unusual transactions.
Other Information in Documents Containing Audited Financial Statements
PCAOB
    When other information is presented in documents containing audited
financial statements, Auditing Standard No. 16 requires the auditor to
communicate to the audit committee the auditor's responsibility under
PCAOB rules and standards for such information, any related procedures
performed, and the results of such procedures.
    AU sec. 550, Other Information in Documents Containing Audited
Financial Statements, requires that if the auditor identifies a
material inconsistency in the other information presented in documents
containing audited financial statements, and the other information is
not revised by management to eliminate the material inconsistency, the
auditor should communicate the material inconsistency to the audit
committee. The auditor should also consider other actions, such as
revising the audit report to include an explanatory paragraph
describing the material inconsistency, as described in paragraph .11 of
AU sec. 508, Reports on Audited Financial Statements, withholding the
use of the report in the document, and withdrawing from the engagement.
The auditor should also communicate a material misstatement of fact to
the client and the audit committee, if the material misstatement of
fact is not corrected.
IAASB
    ISA 720 requires that if the auditor identifies a material
inconsistency in the other information in documents containing audited
financial statements and revision of the other information is necessary
and management refuses to make the revision, then the auditor shall
communicate this matter to those charged with governance and (a)
include in the auditor's report an Other Matter(s) paragraph describing
the material inconsistency in accordance with ISA 706, Emphasis of
Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor's Report; or (b) withhold the auditor's report; or (c) withdraw
from the engagement, where withdrawal is possible under applicable law
or regulation. ISA 720 also requires the auditor to notify those
charged with governance of the auditor's concern regarding the other
information and take any further appropriate action if there is a
material misstatement of fact in the other information which management
refuses to correct.
ASB
    SAS 118 contains similar requirements to those in Auditing Standard
No. 16.

Difficult or Contentious Matters for Which the Auditor Consulted
PCAOB
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee matters that are difficult or contentious for which the
auditor consulted outside the engagement team and that the auditor
reasonably determined are relevant to the audit committee's oversight
of the financial reporting process.
IAASB and ASB
    ISA 260 and AU-C Section 260 do not include a similar requirement.
Management Consultation With Other Accountants
PCAOB
    When the auditor is aware that management consulted with other
accountants about significant auditing or accounting matters and the
auditor has identified a concern regarding such matters, Auditing
Standard No. 16 requires the auditor to communicate to the audit
committee his or her views about such matters that were the subject of
such consultation.
IAASB
    ISA 260 does not include a similar requirement.
ASB
    AU-C Section 260 requires the auditor to communicate to those
charged with governance the auditor's views about matters that were the
subject of management's consultations with other accountants on
accounting or auditing matters when the auditor is aware that such
consultations occurred.
Going Concern
PCAOB
    Paragraph 17 of Auditing Standard No. 16 includes a requirement for
the auditor to communicate to the audit committee, when applicable,
certain matters relating to the auditor's evaluation of the company's
ability to continue as a going concern. These matters include (a) If
the auditor believes there is substantial doubt about the company's
ability to continue as a going concern for a reasonable period of time,
the conditions and events that the auditor identified that, when
considered in the aggregate, indicate that there is substantial doubt;
(b) If the auditor concludes, after consideration of management's
plans, that substantial doubt about the company's ability to continue
as a going concern is alleviated, the basis for the auditor's
conclusion, including elements the auditor identified within
management's plans that are significant to overcoming the adverse
effects of the conditions and events; (c) if the auditor concludes,
after consideration of management's plans, that substantial doubt about
the company's ability to continue as a going concern for a reasonable
period of time remains, the effects, if any, on the financial
statements and the adequacy of the related disclosure and the effects
on the auditor's report.
IAASB
    ISA 570 requires the auditor to communicate events or conditions
identified that may cast significant doubt on the entity's ability to
continue as a going concern. This communication includes whether the
events or conditions constitute a material uncertainty; whether the use
of the going concern assumption is appropriate in the preparation and
presentation of the financial statements; and the adequacy of related
disclosures in the financial statements.
ASB
    SAS 126 requires the auditor to communicate with those charged with
governance the nature of the conditions or events identified, the
possible effects on the financial statements and the adequacy of
related disclosures in the financial statements, and the effects on the
auditor's report if, after considering identified conditions or events
in the aggregate and after considering management's plans, the auditor
concludes that substantial doubt about the entity's ability to continue
as a going concern for a reasonable period of time remains.
Uncorrected and Corrected Misstatements
PCAOB
    Auditing Standard No. 16 requires the auditor to provide the audit
committee with the schedule of uncorrected misstatements related to
accounts and disclosures that the auditor presented to management.
Auditing Standard No. 16 also requires the auditor to discuss with the
audit committee, or determine that management has adequately discussed
with the audit committee, the basis for the determination that the
uncorrected misstatements were immaterial, including the qualitative
factors considered. Additionally, Auditing Standard No. 16 requires the
auditor to communicate that uncorrected misstatements or matters
underlying those uncorrected misstatements could potentially cause