The guidance provides a high-level look at what constitutes a "critical audit matter" and how it should be described in an auditor report, as well as a discussion of potential issues that may arise.
The Public Company Accounting Oversight Board has released staff guidance developed to support implementation of the new critical audit matter (CAM) requirements under AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The staff provided an overview of CAM requirements, observations made following a review of audit firms’ CAM methodologies, and responses to potential questions that could arise in CAM determination.
"The Board is committed to supporting effective implementation of CAMs, which are intended to make the auditor's report more relevant to investors and other financial statement users," said PCAOB Chairman William Duhnke.
CAM requirements. A CAM is defined as any matter arising from the audit of the financial statements required to be reported to the audit committee that relates to accounts or disclosures material to the financial statements and involves especially subjective or complex auditor judgment. According to the PCAOB, the determination of a CAM depends on the facts and circumstances of each audit and may not necessarily relate to a single account or disclosure. Factors to take into account when determining whether a matter involves an elevated judgment include, among other things: (1) the degree of judgment or estimation; (2) the nature and timing of significant unusual transactions; (3) the degree of auditor subjectivity in applying audit procedures; and (4) the extent of audit effort required.
For each CAM communicated in the auditor’s report, the auditor must describe the principal considerations that led the auditor to determine that the matter is a CAM and how the CAM was addressed in the audit. The auditor also must refer to the relevant financial statement accounts or disclosures. If the auditor chooses to describe audit procedures, the PCAOB expects the description to be written in a manner that investors and other financial statement users can understand. The Engagement Quality Reviewer (EQR) is required to evaluate the engagement team’s determination of, and documentation regarding, CAMs.
CAM implementation is effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and, for other companies, fiscal years ending on or after December 15, 2020. CAMs are not required for audits of brokers and dealers, investment companies other than business development companies, employee plans, and emerging growth companies.
Methodologies. The PCAOB staff also engaged in a review into how audit firms are preparing to implement the new CAM requirements. The staff found that some firms’ methodologies excluded certain audit committee communications from the source of CAMs although the standard does not exclude any such communication from potential CAMs. The staff also discovered that in determining what matters involved challenging or complex judgment, certain methodologies did not prompt auditors to consider audit-specific factors beyond those listed in the standard. The staff further noted that stating that a CAM was especially challenging and complex is not sufficient without specific language explaining why this is the case. Auditors also must particularly tailor CAM communications audits and avoid standardized language, the staff explained.
Further guidance. The PCAOB staff also provided guidance focusing on questions that may arise when determining CAMs. The staff noted that CAMs stand out from other matters addressed during an audit due to the especially complex auditor judgment they require; "a CAM in a previous period would not cease to be a CAM just because another matter arose in the current period requiring even more challenging, subjective, or complex auditor judgment," the staff explained. Further, according to the staff, an auditor must provide a clear and concise discussion of why a matter is a CAM, and a matter may be determined to be a CAM even if the auditor has ample experience and access to experts. The CAM requirements are principles-based and should be applied in the context of the facts and circumstances of each specific audit, the staff stated.
The determination and communication of CAMs is to be done each year, the staff noted, and some matters may remain CAMs over time or recur intermittently. When evaluating significant business, economic, or regulatory events for purposes of determining CAMs, an auditor needs to consider the impact on the audit, including the nature, timing, and extent of the audit response required to address any issues affecting accounts or disclosures, according to the staff. However, the staff explained, the evaluation and determination process for control deficiencies does not relate to a financial statement account or disclosure and would not, in and of itself, be a CAM. If a significant deficiency is among the principal considerations in a CAM determination, the auditor would describe the relevant control-related issues in the broader context of the CAM without using the term "significant deficiency," according to the staff.
The criteria involved in identifying "significant risks" overlap with the factors relevant in determining CAMs, but they are not identical, the staff noted.
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