The continuing focus on lessons learned from the global financial crisis has prompted the Public Company Accounting Oversight Board (PCAOB) to release two landmark proposals designed to address longstanding criticisms of auditor reporting. As critics grew more vocal in the aftershocks of the severe economic upheaval and unexpected business failures of 2008 and 2009, the PCAOB responded with a multi-year study of the pros and cons of various potential changes. Today's proposals have been years in the making, and they pave the way for the first major changes in decades in the content of the audit reports issued by independent auditors of public companies. This Messenger summarizes the proposals, expected benefits, and open questions. The appendix shows an example of how audit reports might look in the future.

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The continuing focus on lessons learned from the
global financial crisis has prompted the Public
Company Accounting Oversight Board (PCAOB) to
release two landmark proposals designed to address
longstanding criticisms of auditor reporting. As critics
grew more vocal in the aftershocks of the severe
economic upheaval and unexpected business failures
of 2008 and 2009, the PCAOB responded with a multi-
year study of the pros and cons of various potential
changes. Today’s proposals have been years in the
making, and they pave the way for the first major
changes in decades in the content of the audit reports
issued by independent auditors of public companies.
This Messenger summarizes the proposals, expected
benefits, and open questions. The appendix shows an
example of how audit reports might look in the future.
Overview of proposals
The PCAOB has combined its proposed changes
to auditor reporting into a single release known as
PCAOB Release No. 2013-05 dated August 13, 2013
(the Release). This nearly 300-page release weaves
together two sets of proposed audit standards and
related amendments. One set of proposals aims to
provide more useful information for investors by
prescribing specific kinds of additional information
September 2013
Audit Reports for Public Companies:
PCAOB Proposes First Major Changes in Decades
that auditors would be required to include in their
reports about audits of financial statements. The other
set seeks to broaden the auditor’s involvement with
supplemental or “other” information that is provided
in annual reports that include the audited financial
statements. Additional details are provided below.
A. Expanded reports on audits of financial
statements
The first of the two proposed audit standards
is entitled, The Auditor’s Report on an Audit of
Financial Statements When the Auditor Expresses an
Unqualified Opinion. This standard would retain the
generic characteristics of what is commonly known
as a pass/fail type of audit opinion in which a pass
indicates the financial statements are fairly presented,
while a fail indicates they are not. But the proposed
standard would go beyond the generic opinion by
imposing a new requirement that auditors provide
more information specific to the audit, including the
following.
1. Descriptions of “critical audit matters.” This
item would generally require a discussion of
some of the more challenging issues that were
addressed by the auditor during the audit of the
financial statements. Specifically, the discussion
would focus on issues that either: (a) involved
the most difficult, subjective, or complex auditor
judgments, (b) posed the most difficulty in
obtaining sufficient appropriate audit evidence
or (c) posed the most difficulty to the auditor in
forming an opinion on the financial statements.

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Examples: valuations of assets that have no
readily ascertainable market value, the timing
and amount of impairments, contingencies such
as possible exposures in lawsuits or regulatory
investigations, exposure to loan losses, and
conclusions regarding going concern issues.
If no matters are communicated as critical audit
matters, the auditor’s report would be required
to state that no such matters were identified by
the auditor and the work papers would need to
document the reasons for not doing so. If one or
more matters are communicated as critical audit
matters, the information in the auditor’s report
would include:
• Identification of the critical audit matter,
• The considerations that led the auditor to
determine that the matter is a critical audit
matter, and
• The relevant financial statement accounts
and disclosures, when applicable.
Expected benefits: The intent is to help fill a
gap that evolved as global business operations
and financial reporting requirements grew
more complex over the years, resulting in the
need to use more judgments and estimates in
areas such as fair value measurements where
small differences in assumptions can have very
material consequences.
2. Additional information about the audit and
auditor. The proposal would require that the
audit report contain statements about each of the
following areas:
• The auditor’s independence. This item would
include a statement about the auditor’s
existing requirements to be independent of
the company.
• The auditor’s tenure. This item would include
the year the auditor began serving as the
company’s auditor.
• The auditor’s evaluation of supplemental
or “other” information. This item would
include a statement describing the auditor’s
responsibility for evaluating other information
in annual reports filed with the SEC containing
the financial statements and the related
auditor’s report, along with the results of that
evaluation.
The proposal would also require clearly-worded
statements of some existing responsibilities, such
as the auditor’s responsibility with regard to the
notes to the financial statements.
Expected benefits: The general intent is to
enhance investors’ and other financial statement
users’ understanding about these matters and to
serve as a reminder to auditors of their obligations
in these areas. However, the statement about
supplemental information would also provide
the results of the auditor’s evaluation of this
information, if the second proposed audit standard
is finalized.
B. Auditor’sinvolvementwith“other”information
The second of the two proposed new audit standards
is entitled, The Auditor’s Responsibilities Regarding
Other Information in Certain Documents Containing
AuditedFinancialStatementsandtheRelatedAuditor’s
Report. This proposed standard would require that
auditors perform certain procedures designed to
evaluate supplemental or “other” information as a
basis for reporting some of the additional information
described in the preceding section.
1. Scope of “other” information. For purposes of
this standard, other information would be defined
as information (other than the audited financial
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statements and related auditor’s report) that is
included in the annual report that is filed by a
company with the SEC under the Exchange Act
and that contains the company’s audited financial
statements and the related auditor’s report.
Examples: Risk Factors, Selected Financial data,
Management’s Discussion and Analysis (MD&A),
exhibits, and certain information incorporated
by reference. Exclusions: The proposed other
information standard would not apply to information
formatted in eXtensible Business Reporting
Language (XBRL) that is furnished with the SEC
as an exhibit or otherwise.
2. Procedures to be performed. The auditor’s
evaluation of the supplemental information would
be based on relevant audit evidence obtained and
conclusions reached during the audit. The auditor
would be required to evaluate the information for
a material misstatement of fact, as well as for a
material inconsistency with the audited financial
statements in the amounts, information, or manner
of presentation.
Comparison with current standards. The current
audit standards require the auditor to read the
supplemental or other information and consider
whether the information is materially inconsistent
with information in the financial statements,
then follow certain procedures to respond to
any material inconsistency. If, while reading the
other information for a material inconsistency, the
auditor becomes aware of a material misstatement
of fact in the other information, the auditor would
discuss this with management and perform other
procedures based on the auditor’s judgment. In
contrast, the proposed other information standard
includes procedures that auditors consistently
would perform in evaluating the other information.
This evaluation would represent a broadening of
the auditor’s responsibility.
Expected benefits. The proposed procedures
would enable the auditor to identify potential
inconsistencies between the other information
and the company’s financial statements that
would otherwise be difficult for investors and
other financial statement users to identify when
analyzing the company’s financial performance.
The PCAOB believes these added insights would
promoteconsistencybetweentheotherinformation
and the audited financial statements, which in
turn could improve the quality of the information
available to investors and thereby lower the cost of
capital. The Board believes that, in practice, some
auditors currently perform procedures related
to other information similar to the procedures in
the proposed other information standard. Other
auditors may incur additional costs. On balance,
the Board believes the proposed approach
represents a cost-sensitive approach that would
be scalable to less complex companies based on
the nature and extent of the information outside
their financial statements compared to companies
with more extensive operations.
Open questions
ThecommentperiodfortheReleaseendsonDecember
11, 2013. Although comments are requested on all
aspects of the proposed standards and amendments,
the PCAOB is requesting comments on a number of
specific open questions. The questions raised by the
proposal and by the PCAOB members include the
following:
• What are some additional examples of critical
audit matters that could be communicated in
the auditor’s report under the proposed auditor
reporting standard?
• What are the costs and benefits associated with
the proposals?
• How valuable is the information on critical audit
matters and audit tenure to investors?

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
• To what extent would the proposed standard
on other information increase the quality of
information available to investors?
• Are the current proposals strong enough to meet
the needs of investors? Could they be enforced
effectively?
• Are some accounting firms already performing the
proposed procedures related to other information,
and, if so, would the cost of implementing the new
standards fall disproportionately on small- to mid-
sized firms?
• How, if at all, should the scope of the other
information standard be broadened? For example,
should it apply to registration statements filed
under the Securities Act of 1933 or glossy annual
reports that are distributed by companies but not
filed with the SEC?
• Should the proposed standards and amendments
apply to audits of brokers and dealers?
• Should the proposed standards and amendments
apply to audits of companies that qualify as
emerging growth companies under the JOBS Act?
• How would the proposals affect broad economic
and market considerations, such as efficiency,
competition and capital formation?
• Would any of the proposals have unintended
consequences? Examples: Would they lead to
disclosures of borderline going concern issues
that do not involve “substantial doubt?” Would
investors misunderstand the scope of the other
information standard and/or the relationship
between auditor tenure and audit quality?
Additional questions may arise as the pros and cons
of the PCOAB’s proposals are compared with those
of international standard setters and regulators. The
International Auditing and Assurance Standards Board
recently issued its proposal on auditor reporting, and
the European Commission has also been working on
a project to change the auditor’s report.
There may also be some overlap with suggested audit
quality reporting guidelines published in a “Resource
on Audit Quality Reporting” by the Center for Audit
Quality around the same time as the PCAOB’s
Release. The CAQ’s Resource is designed to help
accounting firms report publicly and voluntarily on
their commitment to audit quality. The information
to be reported includes auditor independence, audit
process and methodology, and firm organization and
structure.
Tentative effective date
Because there are so many open questions, it is
possible that the proposed standard may be refined
and re-proposed at a later time. Any standards or
amendments would need to be approved by the
SEC before they become effective. As the proposals
stand now, the tentative effective date, subject to
SEC approval is for fiscal years beginning on or after
December 15, 2015.
For more information
If you would like more information about the topics
discussed in this Messenger, please contact Rich
Howard of MHM’s Professional Standards Group or
your MHM service professional. You can reach Rich
directly at rhoward@cbiz.com or 949.450.4402.

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MHM Messenger 17-13 Appendix: Audit Reports for Public Companies:
PCAOB Proposes First Major Changes in Decades
An Illustrative Auditor’s Unqualified Report
The following illustrative report is adapted from the PCAOB’s Release 2013-05, p 46 and 47. Changes from the illustrative
report under the current standard are underlined.
Report of Independent Registered Public Accounting Firm
To the shareholders and board of directors of X Company
[Introduction] To the shareholders and board of directors of X Company
We have audited the accompanying balance sheets of X Company (the “Company”) as of December 31, 20X2 and
20X1, the related statements of operations, stockholders’ equity, and cash flows, for each of the three years in the
period ended December 31, 20X2, and the related notes (collectively referred to as the “financial statements”). These
financial statements are the responsibility of the Company’s management.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) (United
States) and are required to be independent with respect to the Company in accordance with the United States federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and the
PCAOB. We or our predecessor firms have served as the Company’s auditor consecutively since [year].
[Basis of
Opinion]
Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We conducted
our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include
examining, on a test basis, appropriate evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
[Opinion on
the Financial
Statements]
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of [at] December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 20X2, in conformity with [the applicable financial reporting
framework].
Critical Audit Matters
The standards of the PCAOB require that we communicate in our report critical audit matters relating to the audit of
the current period’s financial statements or state that we determined that there are no critical audit matters. Critical
audit matters are those matters addressed during the audit that (1) involved our most difficult, subjective, or complex
judgments; (2) posed the most difficulty to us in obtaining sufficient appropriate evidence; or (3) posed the most
difficulty to us in forming our opinion on the financial statements. The critical audit matters communicated below do
not alter in any way our opinion on the financial statements, taken as a whole.
[Include critical audit matters]
The Auditor’s Responsibilities Regarding Other Information
In addition to auditing the Company’s financial statements in accordance with the standards of the PCAOB, we
evaluated whether the other information, included in the annual report on [SEC Exchange Act form type] filed with
the SEC that contains both the December 31, 20X2 financial statements and our audit report on those financial
statements, contains a material inconsistency with the financial statements, a material misstatement of fact, or both.
Our evaluation was based on relevant audit evidence obtained and conclusions reached during the audit. We did not
audit the other information and do not express an opinion on the other information. Based on our evaluation, we have
not identified a material inconsistency or a material misstatement of fact in the other information.
[Signature]
[City and State or Country]
[Date]