On September 10, the Securities and Exchange Commission posted for comment Auditing Standard No. 16, “Communications with Audit Committees,” adopted by the Public Company Accounting Oversight Board (PCAOB) on August 15. The new standard sets out a list of specific requirements designed to improve communication between auditing firms and public company audit committees. Many of these requirements supersede interim standards or otherwise reflect, expand or modify current practices.

Among the issues that the auditor is required to discuss with the audit committee prior to the issuance of an auditor’s report (or, to the extent these standards are relevant to interim financials, prior to Form 10-Q filings), are the following:

• Significant issues that the auditor discussed with management in connection with the appointment or retention of the auditor;
   
• The objectives of the audit, overall audit strategy, including the timing of the audit and significant risks identified during the auditors risk assessment procedures;
   
• If applicable, the nature and extent of specialized skill or knowledge needed to perform the audit procedure and the extent to which the auditor plans to use the work of the company’s internal auditors;
   
• Management’s initial selection of or changes in significant accounting policies in the current period and their effect on the financial statements or disclosures;
   
• A description of the process management used to develop critical accounting estimates, including management’s significant assumptions in connection therewith and any significant changes management made in the processes used to develop critical accounting estimates or significant assumptions;
   
• An assessment of critical accounting policies and practices along with significant modifications to these policies and practices proposed by the auditor that management did not make;
   
• The auditor’s evaluation of the quality of the company’s financial report including with respect to situations in which the auditor identified bias in management’s judgment about the amount and disclosures in the financial statements;
   
• Significant unusual transactions as well as matters that are difficult or contentious for which the auditor consulted outside the engagement team;
   
• 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;
   
• Any significant difficulty encountered during the audit, including delays, an unreasonably brief time within which to complete the audit or unreasonable management restrictions in the conduct of the audit;
   
• 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, the views of the auditor about such matters; and
   
• Whether the audit committee is aware of violations of regulations or law that may be relevant to the audit.

In addition, the auditor is required to provide the audit committee with a schedule of uncorrected
misstatements related to accounts and disclosures and, if the auditor believes there is a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, matters related to that concern.

Comments are to be submitted to the SEC on or before 21 days from publication in the Federal Register. The PCAOB expects the new standards to be effective for quarterly reviews and audits for fiscal years beginning on or after December 15, 2012.

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