4230.1 Going Concern Modifications [AS 2415]
a. Going concern modifications are required by PCAOB standards and U.S. GAAS in certain circumstances.
b. Filings that include reports having going concern modifications must also include appropriate and prominent disclosure of the financial difficulties giving rise to that uncertainty. Discussion of a viable plan that has the capability of removing the threat to the continuation of the business must be included. The plan may include a "best efforts" offering so long as the amount of minimum proceeds necessary to remove the threat is disclosed. The plan should enable the issuer to remain viable for at least the 12 months following the date of the financial statements being reported on. If management has no viable plan, the use of going concern financial statements may be inappropriate and liquidation-basis financial statements may be necessary or the classification and amounts of assets and liabilities may need to be adjusted. [FRC 607.02] AU 341 does not apply to an audit of financial statements based on the assumption of liquidation.
c. Going concern opinions that do not use the words "substantial doubt" when referencing a going concern matter do not comply with PCAOB standards/U.S. GAAS.
d. Going concern opinions that use conditional language in expressing a conclusion concerning the existence of substantial doubt about the entity's ability to continue as a going concern are not appropriate.
e. A disclaimer of opinion, "except for" opinion, or an adverse opinion resulting from going concern matters is permitted by AS 2415, but none of these types of opinion comply with the requirements of S-X Article 2.
4230.2 Changes in Accounting Principles [ASC 250, AS 2820, S-X 10-01]
a. A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report. [AS 2820, paragraph 8]
b. The correction of a material misstatement in previously issued financial statements should be recognized in the auditor's report on the audited financial statements through the addition of an explanatory paragraph. [AS 2820, paragraph 9]
c. Preferability Letters
The presumption that an entity should not, in the absence of the issuance of a new accounting standard, change an accounting principle may be overcome only if the company justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. [ASC 250-10-45-12] The registrant is required to file a letter from its independent accountant concurring with its conclusion as to the new method's preferability. [S-X 10-01; SAB Topic 6G.2.b]
1. Preferability letters must be included in Form 10-Q or Form 10-K as Exhibit 18 and need only be filed once in the first applicable 1934 Act filing following the change. Preferability letters are not required in 1933 Act filings. A preferability letter generally is required in Form 10-K only when a change in accounting occurs in the fourth quarter. Even though the independent accountant referred to the change in its audit report as required by PCAOB standards and concluded as to the preferability of the change, S-K 601 requires that a preferability letter be included as an exhibit to the Form 10-K (unless it was previously filed).
2. The staff has objected to the change from one acceptable method to another acceptable method if the registrant and its independent accountants cannot demonstrate that the new method is preferable. Conforming to industry practice may not justify a change if industry practice is not the preferable method.
3. Preferability letters are not required after a business combination where changes in the acquired entity's accounting are made to conform to those of the acquiring entity.
4. A preferability letter is not required for a change in estimate effected by a change in accounting principle.
5. A preferability letter is not required for changes that are mandatory or will be mandatory.
4230.3 Clarification in Audit Report Regarding No Audit of Internal Control Over Financial Reporting [SOX 404(b), S-K 308(b), AS 3105]
In a financial statement audit of an issuer or non-issuer that has determined it is not yet required to obtain, nor did it request the auditor to perform, an audit of internal control over financial reporting under SOX 404(b) and S-K 308(b), a firm may, but is not required to, expand its audit report to clarify this fact. A firm may include a statement that the purpose and extent of the auditor's consideration of internal control over financial reporting was to determine that the nature, timing, and extent of tests to be performed are appropriate in the circumstances, but was not sufficient to express an opinion on the effectiveness of internal control over financial reporting. If a firm chooses to expand its report to clarify this point, the scope paragraph in the audit report should follow the suggested language in AS 3105.59 to .60.
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