The PCAOB has proposed a new auditing standard on communications with audit committees which would supersede interim standards AU sec. 380 and AU sec. 310. The proposed standard governs the communications that auditors must have with the audit committees of public company boards of directors. Acting Chair Daniel Goelzer said the proposed standard is intended to enhance the effectiveness of the communications between an auditor and an audit committee throughout the course of an engagement. Comments on the proposed standard should be submitted by May 28, 2010.

The standard would require an auditor to establish a mutual understanding with the audit committee with respect to the terms of the audit engagement. The information that is communicated must be included in the audit engagement letter.

Auditors would be required to discuss with the audit committee their audit strategy, including any significant risks, and the roles of any others who will participate in the audit. They must discuss critical accounting policies, practices and estimates. The auditor must also share any evaluations with respect to a company’s ability to continue as a going concern. Auditors would be required to evaluate whether the two-way communication with the audit committee was adequate to achieve the objectives of the audit.

Board member Steven Harris said the proposed standard adds value to the existing standards by emphasizing the importance of discussing significant assumptions used in critical accounting estimates when there is a high degree of subjectivity. Auditors must also discuss material changes to those estimates and the range of possible outcomes.

Harris noted that the proposal includes an appendix which compares the requirements of the proposed standard with those of the International Auditing and Assurance Standards Board and the Auditing Standards Board. He believes it is important to include this analysis with all of the Board’s proposed standards and to include an explanation of why the Board’s standards are in the best interests of investors.

Chief Auditor Martin Baumann said the proposed standard was influenced by a number of factors, including the increasing use of risk-based audits. The Board’s Standing Advisory Group has discussed auditor communications on several occasions and supports a new standard to enhance communications with audit committees, particularly in the area of critical accounting estimates, he said. Baumann credited the SEC for providing timely and helpful assistance in drafting the standard.

Deputy Chief Auditor Jennifer Rand said the proposal combines elements of both interim standards. The standard’s goals are to enhance the relevance and effectiveness of communications and to emphasize the importance of two-way communications. She noted that SAG members believe that effective two-way communications will improve the audit process. The requirement that auditors evaluate whether the two-way communication has been adequate to achieve the objective of the audit was included in the standard to emphasize that communication is essential to achieving that objective.

Staff member Barbara Vanich said the auditor must establish an understanding with the audit committee, not with management, with regard to the audit. She said the definition of critical accounting estimates is based on the SEC’s definition rather than the definition found in AU sec. 380. The communications with the audit committee must be timely and must be described in sufficient detail that another auditor would be able to understand what was discussed. The written communications will help the engagement review partner, she noted.

Board member Charles Niemeier voted to issue the proposed standard for comment but expressed some skepticism about whether it would lead to more robust communications. It’s more about the culture, he said.

In response to a question by Goelzer about whether the standard will be workable for different sizes and types of reporting entities, the staff said the standard is scalable but has asked for comments about whether there are any additional issues they did not consider.