SAS 134: Changes to Expect from the New Audit Reporting Standards

Written by Adam Nelson on July 18, 2022

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Your next financial statement audit might look and feel a little different. In May 2019, the AICPA’s Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments Addressing Disclosures in the Audit of Financial Statements. The new auditing standards are effective for reporting periods ending on or after December 15, 2021. So calendar-year entities will see the changes in their December 31, 2021 audit report.

Previously, SAS 134 was supposed to be effective for calendar year 2020 year ends, but the ASB deferred implementation for one year, due in part to the pandemic.

While these changes primarily impact your audit team, they affect the format and content of your audit report, so it’s a good idea to be aware of the changes.

What Is SAS 134?

SAS 134 impacts three key areas: the engagement letter, the planning letter and the auditor’s opinion. These changes are intended to provide financial statement users with additional visibility and transparency into risks, management and auditor responsibilities and the results of the audit.

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Below, we cover each of those key changes in more detail.

Engagement Letter: Auditor’s Responsibility for Non-Audit Services

One change to the format of the engagement letter is where the auditor’s responsibility for non-audit services is located. After the implementation of SAS 134, this information will now be included in the “Other Services” section instead of the “Responsibilities of Management of the Financial Statements.”

Engagement Letter: Ability To Continue as a Going Concern

SAS 134 now requires auditors to include a statement in the Responsibilities of Management section of the engagement letter explicitly stating that management is required to evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue operations for the next twelve months, or as a going concern. This sentence will be present whether or not there is any doubt about going concern.

Planning Letter: Significant Risks

Before SAS 134, in addition to the engagement letter, auditors would send another letter, commonly referred to as the Planning Letter, to the company’s governance team. This letter discussed, at a high level, the nature and timing of the audit.

SAS 134 adds a requirement to communicate with governance the significant risks identified for the audit. For every audit, the auditor is required to obtain an understanding of the client and its environment.

As the auditor goes through this process, they identify potential areas where something could go significantly wrong. These are considered key audit matters or significant risks and necessitate extra focus.

For these significant risks, the auditor will need to understand the company’s controls around the area of concern; evaluate whether those controls have been suitably designed and implemented into operations; and perform specific audit procedures tailored to the risks identified.

Having the auditors identify a significant risk does not mean there is an issue with the audit—it simply means the audit team will plan their audit procedures to ensure they spend extra time in those areas.

Combining Planning and Engagement Letters

SAS 134 also introduces the option to use the engagement letter to communicate with governance so that those significant risks may appear in the engagement letter rather than in a separate planning letter.

Auditors’ Opinion: Layout

The layout of the auditors’ report has changed. It used to start by describing the responsibilities of management, but SAS 134 emphasizes the auditor’s opinion by putting it front and center in the report’s first paragraph. This placement is designed to help financial statement readers better understand the results of the audit—particularly whether it was a “clean” opinion.

SAS 134 also requires auditors to include a paragraph explaining the basis for the auditor’s opinion immediately after the opinion itself. Previously, a basis for opinion paragraph was only required for reports with modified, or “unclean”, opinions.

Auditors’ Opinion: Auditor Responsibilities

Auditor responsibilities are also clearly spelled out in the new auditors’ report format. The report states that the auditor’s objectives are to obtain reasonable assurance about whether the financial statements are free from material misstatement due to fraud or error and to issue an auditors’ report that includes their opinion.

The report will also provide further details on the auditor’s responsibilities, including communication with those charged with governance about:

  • Scope
  • Timing
  • Significant findings
  • Internal control
  • Other matters uncovered during the audit

Auditors’ Opinion: Going Concern

If the auditor determines that there is substantial doubt about the entity’s ability to continue as a going concern, they are required to state this fact in a separate section of the auditor’s report under the heading, Substantial Doubt about the Entity’s Ability to Continue as a Going Concern.

This title replaces the previous heading, Emphasis of Matter, which was much more vague.

Learn More About SAS 134

You and your auditor should discuss how these changes will affect your financial statement audit and auditors’ report. You may also want to discuss these changes with users of your financial statements, including bankers, shareholders and investors, so they will not be surprised by the new format.

If you have any questions about the new auditing standards or how they will impact your organization or would like to see a sample audit report, please contact your Warren Averett advisor or ask a member of our team to reach out to you.

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