Critical Audit Matters: What Public Companies Need to Consider
By Matthew Jahrsdoerfer, Director, Assurance Services
The Public Company Accounting Oversight Board (“PCAOB”) has adopted a new accounting standard, AS 3101, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses and Unqualified Opinion,” requiring auditors to include a discussion of Critical Audit Matters (“CAMs”) in the auditor’s report.
CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that:
- Relates to accounts or disclosures that are material to the financial statements: and
- Involves especially challenging, subjective, or complex auditor judgment.
The purpose of CAMs is to provide audit-specific information that is meaningful for investors and other financial statements users. CAMs are intended to provide information specific to the audit from the auditor’s point of view.
When communicating CAMs in the auditor’s report, the auditor must identify the CAM, describe the principal considerations that led the auditor to determine that the matter is a CAM, describe how the CAM was addressed in the audit, and refer to the relevant financial statement accounts or disclosure that relate to the CAM. Some examples of CAMs could include but are not limited to implementation of a new accounting standard, business combination, income taxes, revenue recognition, loss contingencies, going concern analysis and goodwill impairment.
Although auditors are required to share draft auditor’s reports with the Audit Committee, CAMs are the sole responsibility of the auditor. So why should audit committees or management be concerned about CAMs? The answer is that the audit report will be providing new information to investors that was previously provided only to the Audit Committee and management. In preparing for this new standard, companies may want to review their internal controls to determine if any areas need strengthening. It is important to note that CAMs are not necessarily meant to reflect negatively on the company or necessarily indicate that the auditor found a misstatement or deficiency in internal controls. Companies may, however, be scrutinized by investors depending on what types of CAMs are discussed in the audit report. Also, when describing CAMs in the auditor’s report, the auditor is generally not expected to provide information about the company that has not been made publicly available by the company. The auditor should discuss with the Audit Committee and management the treatment of any sensitive information.
There is no specific number of CAMs that should be communicated in the auditor’s report. The number of matters reported as CAMs will depend on the nature and complexity of each company’s audit. It is expected, however, that in most audits the auditor will determine that at least one matter involved especially challenging, subjective or complex auditor judgment. It is also important to note that the PCAOB does not require the audits of emerging growth companies to comply with this new standard.
The effective date for AS 3101 for large accelerated filers is fiscal years ending on or after June 30, 2019, and for all other filers the date is fiscal years ending on or after December 15, 2020. As with any new pronouncement or standard, it is imperative that auditors, audit committees and management have discussions early in the process. This would include analyzing and drafting consideration of CAMs disclosure in the audit report and conveying them to the Audit Committee well in advance of a company filing.