Lauren Williams, Johnson Lambert
The American Institute of Certified Public Accountants has issued Statement on Auditing Standards (SAS) 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements. Lauren Williams of Johnson Lambert explains what it means for you.
Statement on Auditing Standards (SAS) 134, which relates to audits of financial statements for the period ending on or after December 15, 2020, dramatically modifies the form and content of the auditor’s report. Among other things, it gives captives owners and governing boards an opportunity to elect optional reporting on key audit matters (KAMs) within the auditor’s report.
The sweeping changes impact all auditor’s reports under generally accepted auditing standards (GAAS) in the US.
What’s driving the change?
The American Institute of Certified Public Accountants issued SAS 134 to better align its audit reporting standards with those of the Public Company Accounting Oversight Board and International Auditing and Assurance Standards Board. The revisions make the auditor’s report more relevant and informative to financial statement users.
Auditor’s report layout
The form and content of the auditor’s report is modified as follows:
- Opinion: required to be the first paragraph
- Basis for Opinion: required to follow the opinion, and includes a new statement on auditor independence and ethical responsibilities
- KAMs: optional
- Responsibilities of management for the financial statements: includes a new statement on responsibility for evaluating going concern, regardless of whether there is substantial doubt about going concern
- Auditor’s responsibilities for the audit of the financial statements: includes several new requirements, including:
- A description of reasonable assurance
- Circumstances that may prevent material misstatements being detected
- A description of materiality
- A requirement to conclude on the entity’s ability to continue as a going concern
- Exercising professional judgement and maintaining professional scepticism
- Required communications with those charged with governance
These changes are required: auditors may not remove the going concern language, even when the audit evidence does not indicate there is substantial doubt about the entity’s ability to continue as a going concern.
“Captives owners and those charged with governance need to consider whether they want to engage the auditor for this new reporting option.”
In the past the term ‘going concern’ has been used only when substantial doubt was raised. Therefore, management may need to educate those charged with governance and other financial statement users that this language is no cause for alarm—that is, unless management assesses and the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern.
Captive insurers should also expect conforming modifications to other audit communications: engagement letters, communications with those charged with governance (audit plan and audit results), and management’s representation letter. The auditor is responsible for implementing the revisions and may charge clients a one-time implementation fee.
KAMs (optional reporting)
Management, and those charged with governance, have the option to engage the auditor-communicated KAMs within the auditor’s report. SAS 134 defines KAMs as “those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period. KAMs are selected from matters communicated with those charged with governance.”
While KAMs reporting is at the election of management and those charged with governance, the auditor uses professional judgement to determine which matter(s) in the audit are KAMs. Auditors are currently required to report the following to those charged with governance in the audit plan or the audit results:
- Areas of higher assessed risk of material misstatement
- Significant risks
- Areas requiring significant auditor judgement
- The impact of significant transactions or events
The auditor selects only the most significant of these items to communicate as KAMs in the auditor’s report (eg, loss reserves, investment valuation, etc). Below is a sample KAM paragraph that would be inserted after the Basis for Opinion paragraph.
KAMs are those matters that were communicated with those charged with governance and, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each KAM, in accordance with section 701, Communicating KAMs in Independent Auditor’s report, of this SAS]. Description to include:
- A description of the matter
- Why the matter was deemed one of the most significant
- How it was addressed during the audit
Since the determination of KAMs is a matter of professional judgement, those charged with governance should expect variation in KAMs reporting between captive insurance companies, or from period to period for the same captive insurer. Captives owners and those charged with governance need to consider whether they want to engage the auditor for this new reporting option.
KAM considerations for captives
Captives owners should consider the needs of intended financial statement users as they evaluate the organisational benefits compared to the additional cost and time incurred to engage the auditor to report on KAMs.
Captives owners may want to evaluate existing internal communications and auditor communications about potential KAMs and determine if they are satisfied with the level of detail currently afforded.
Finally, the most significant consideration is whether KAMs reporting will result in disclosure of information that is not already public in the auditor’s report.
Captives owners may request a sample draft of the new opinion and ask how KAMs, if elected, will be described in the auditor’s report. Choosing a ‘wait-and-see’ approach will give captives owners additional time to better understand the potential consequences, whether intended or unintended, of the new reporting option. Since it is optional, KAM reporting may be added in future periods.
Lauren Williams is a partner at Johnson Lambert. She can be contacted at: firstname.lastname@example.org
Lauren Williams, Johnson Lambert, The American Institute of Certified Public Accountants, SAS 134