In May 2019, the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements (AU-C section 701), which significantly revised the form and content of auditor's reports on the financial statements of nonpublic entities. This standard affects auditor’s reports on nonpublic entities, and is effective for audits of companies with December 31, 2021 and subsequent fiscal year ends. (The standard was initially effective for periods ending on or after December 15, 2021, but its effective date was deferred for one year by SAS No. 141 because of the COVID-19 pandemic.)

Changes In The Format Of The Auditor’s Report

SAS No. 134 significantly changed the format of the auditor’s report.
The most significant changes are:

• The “Opinion” section is now required to be the first section of the auditor's report. It must have the heading “Opinion” and include the auditor's opinion on the financial statements. The Opinion section of the audit report must include, among other items, the identification of the financial reporting framework and the date or period(s) covered by the financial statements.

• There is a new section, “Basis for Opinion,” which must directly follow the Opinion section. This section states that:
  • The audit was conducted in accordance with U.S. GAAS
  • The auditor is required to be independent
  • The auditor believes that the audit evidence is sufficient and appropriate to provide a basis for the opinion

• There is an expanded description of management's responsibilities for the financial statements in a section with the heading “Responsibilities of Management for the Financial Statements.” This section is now required to include a statement regarding management's responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.

• There is an expanded description of the auditor's responsibilities for the audit in a section with the heading “Auditor's Responsibilities for the Audit of the Financial Statements.” In addition to the description of the auditor's responsibilities currently included in auditor's reports, this section also is required to state that:
  • The auditor's objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a report that includes the auditor's opinion
  • Reasonable assurance is a high level, but not absolute, assurance and is not a guarantee that an audit will detect a material misstatement when it exists 
  • Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements 
  • The auditor exercises professional judgment and maintains professional skepticism throughout the audit
  • The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error
  • The auditor's responsibilities include concluding on the entity's ability to continue as a going concern 
  • The auditor communicates with those charged with governance about, among other matters, the planned scope and timing of the audit and significant audit findings, including certain significant internal control-related matters that the auditor identifies

Other Reporting Frameworks Are Also Affected

Many firms perform audits under the tax basis of accounting, or other special purpose frameworks. AU-C Section 800, Special Considerations - Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, has been amended to reflect the changes in the report format of special purpose frameworks, as contained in SAS No. 139, Amendments to AU-C Sections 800, 805, and 810 to Incorporate Auditor Reporting Changes from SAS No. 134.

This would also affect reporting on financial statements prepared under the cash and modified cash, regulatory and contractual bases of accounting.

Communication Of Significant Risks

SAS No. 134 requires that significant risks be communicated to those charged with governance (For private companies, this often includes or consists of management). For many companies, this will be the first time that such significant risks have been formally communicated. Such communication can be made orally, in the engagement letter, or via a planning AU-C Section 260 letter from the auditor.

Key Audit Matters

SAS No. 134 also added the concept of “Key Audit Matters,” or “KAMs” (AU-C section 701, Communicating Key Audit Matters in the Independent Auditor’s Report).  Key Audit Matters are “[t]hose matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.”

Unlike “Critical Audit Matters,” that are required to be included in the auditor’s report by the PCAOB auditing standards, KAMs are not a required disclosure under SAS No. 134, unless the auditor is engaged to report on them.