The June 2017 installment of this column covered “Reporting on Restatement Adjustments after an Auditor Change” (http://bit.ly/2pQMClB). This installment expands on that theme, providing guidance for when an auditor is requested to reissue an audit report as a predecessor auditor on the financial statements of a former client that are not expected to be restated, but will be presented comparatively with financial statements of a later period audited by a successor. This guidance would apply in virtually all instances when such comparative financial statements are intended for inclusion in an SEC filing, but not for private companies, for which reissuance is far less common. This is because merely providing additional copies of an original audit report when intended to be used with prior financial statements as originally issued is not a report reissuance. In such cases, the auditor has no responsibility to make further investigation or inquiry about events that may have occurred during the period between the original date of the auditor’s report and the date of the release of the additional copies. The standards cited below apply only when the prior period financial statements are presented comparatively with subsequent period financial statements audited by a successor auditor.

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Relevant Procedures

The procedures required for reissuing reports on audits of private companies and SEC issuers are set forth in the AICPA’s AU-C section 560.19 and the PCAOB’s AS 3105.55, respectively, and are identical. The objective of these required procedures is to enable a predecessor auditor to consider whether the report previously issued is still appropriate, since it is possible that either their current form or manner of presentation, or one or more subsequent (or subsequently discovered) events, could make it inappropriate. Unfortunately, however, the standards provide little or no application guidance.

A predecessor auditor ordinarily would be in a position to reissue the original report on the financial statements of a prior period at the request of a former client only if able to make satisfactory arrangements with the former client that enable the performance of the procedures described below. To make such arrangements, it is generally necessary for the predecessor auditor to obtain client authorization through an engagement letter supplement (which, for SEC issuers, would require audit committee approval).

The predecessor auditor is required to—

  • read the financial statements of the subsequent period that are to be presented on a comparative basis;
  • compare the prior period financial statements as originally reported on by the predecessor auditor with those to be presented on a comparative basis with the subsequent period’s statements;
  • inquire of, and request written representations from, management of the former client, at or close to the date of reissuance, about whether any information has come to management’s attention that would cause management to believe that any of the previous representations should be modified, or any events have occurred subsequent to the date of the latest prior period financial statements reported on by the predecessor auditor that would require adjustment to, or disclosure in, the re-issued prior period financial statements; and
  • obtain a representation letter from the successor auditor stating whether the successor auditor’s audit revealed any matters that, in the successor auditor’s opinion, might have a material effect on, or require disclosure in, the reissued prior period financial statements to be reported on by the predecessor auditor.

The Exhibits contain three templates that may be used to enable compliance with applicable professional standards when requested to reissue an audit report in connection with comparative financial statements to be presented after an auditor change (and no restatement is expected).

Exhibit 1

Engagement Letter Supplement for a Former Client’s Report Reissuance for Comparative Financial Statements

[Date]

Board of Directors or Audit Committee

[Client’s name and address]

[Ladies and] Gentlemen:

In connection with management’s request for us to reissue our report on the financial statements of [client’s name] (the Company) as of and for the year ended [date], this letter supplements our previous letter of engagement dated [date of latest letter of engagement] and sets forth our understanding of the terms and objectives of the additional professional services we have been requested to provide. All the terms of our original letter of engagement shall continue in full force and effect.

DESCRIPTION OF SERVICES

We will perform the limited procedures necessary to comply with the applicable professional standards to enable us to reissue our audit report on the financial statements of the Company as of and for the year ended [date] to be presented on a comparative basis with audited financial statements of the subsequent period audited by a successor audit firm. It is our understanding that these comparative financial statements are to be issued solely for distribution to [describe intended users].

Among other things, those standards require that we obtain, and management will provide us with, a letter of representation assuring us that it has informed us of (a) any information that has come to management’s attention that would cause management to believe that any of its previous representations relative to the prior period financial statements of the Company reported on by our firm should be modified, and (b) any events that have occurred subsequent to the date of those financial statements that would require adjustment to, or disclosure in, those financial statements.

As also required by the standards, management will authorize and request that the successor audit firm provide us with a similar letter of representation stating (a) that it has audited, in accordance with applicable auditing standards, the balance sheet of the Company as of [date of current year’s financial statements] and the related statements of operations, retained earnings, and cash flows for the year then ended, (b) that its audit did not reveal any matters that, in their opinion, might have a material effect on, or require disclosure in, the prior period’s financial statements of the Company, as reported on by our firm, and (c) that it will notify us promptly should anything come to their attention prior to the date their report is issued that, in their judgment, would have a material effect on the financial statements of the Company as of and for the prior year, as reported on by our firm.

You acknowledge that it will be necessary for us to apply additional procedures not presently contemplated to enable us to reissue our report if the financial statements we previously audited are determined to require retroactive restatement.

FEES

Our fees for the additional services described herein will be based on our Firm’s standard hourly billing rates and will be billed, together with out-of-pocket expenses, if any, as the work progresses. Our invoices will be payable upon presentation.

Exhibit 2

Representation Letter from Former Client for a Report Reissuance for Comparative Financial Statements

[Date of successor audit firm’s report]

To [Name of predecessor audit firm]

In connection with the reissuance of your report on the financial statements of [client’s name] as of and for the year ended [date], which statements are to be presented comparatively with similar statements as of and for the year ended [date], we make the following representations.

We have informed you of (a) any information that has come to management’s attention that would cause management to believe that any of our previous representations relative to the prior period financial statements of the Company reported on by your firm should be modified, and (b) any events that have occurred subsequent to the date those financial statements that would require adjustment to, or disclosure in, those financial statements.

Very truly yours,

[Signatures of authorized former client management personnel (such as those who signed original audit representation letter)]

Exhibit 3

Representation Letter from Successor Auditor to Predecessor Auditor for a Report Reissuance for Comparative Financial Statements

[Date of successor audit firm’s report]

To [Name of predecessor audit firm]

In connection with the reissuance of your report on the financial statements of [client’s name] as of and for the year ended [date], which statements are to be presented comparatively with similar statements as of and for the year ended [date], we make the following representations.

We have audited, in accordance with applicable auditing standards, the balance sheet of [client’s name] as of [date] and the related statements of operations, retained earnings, and cash flows for the year then ended. Our audit did not reveal any matters that, in our opinion, might have a material effect on, or require disclosure in, the financial statements of [client’s name] as of and for the year ended [date of prior year’s financial statements] reported on by your firm.

Should anything come to our attention prior to the date our report is issued that, in our judgment, would have a material effect on the prior year’s financial statements of [client’s name], as reported on by your firm, we shall notify you promptly.

Very truly yours,

[Successor audit firm’s signature]

Howard B. Levy, CPA is a principal and director of technical services at Piercy Bowler Taylor & Kern, CPAs, Las Vegas, Nev., and an independent technical consultant to other professionals. He is a former member of the AICPA’s Auditing Standards Board and its Accounting Standards Executive Committee, and a current member of its Center for Audit Quality’s Smaller Firms Task Force. He is a member of The CPA Journal Editorial Advisory Board.