As of June 30, 2019, a new auditing requirement became effective for certain large accelerated filers: auditors of these companies must now communicate critical audit matters (CAMs) in the auditor’s report. (For audits of large accelerated filers, CAM requirements are effective for fiscal years ending on or after June 30, 2019. For audits of all other companies to which they apply, CAM requirements are effective for fiscal years ending on or after December 15, 2020.)

The Public Company Accounting Oversight Board (PCAOB) standard that requires the auditor to communicate this new information about the audit is intended to make the auditor’s report more informative and relevant to investors and other financial statement users. The goal is to shed light on certain matters in an audit that involved especially challenging, subjective, or complex auditor judgment.

The PCAOB is committed to providing assistance and resources to our stakeholders to assist with the effective implementation of CAMs and to promote audit quality generally. The following key considerations may be useful for audit committees when reviewing CAMs in the auditor’s report.

Understand the audit committee’s role. CAMs are solely the responsibility of the auditor, but the new standard does require the auditor to share a draft of the auditor’s report—including any CAMs identified—with the audit committee. Neither audit committees nor management approve CAMs, but as the auditor determines how best to comply with the new requirements, the auditor could discuss with the audit committee (as well as management) the treatment of any sensitive information. Other than the aforementioned new requirement, other PCAOB requirements for audit committee communications remain the same.
Learn how your auditor will determine CAMs. The standard requires an auditor to use a principles-based framework to determine CAMs. The chart on page two of this PCAOB Audit Committee Resource illustrates some of the key steps an auditor will go through to determine if a matter is a CAM and what the auditor will communicate in the auditor’s report if a CAM is identified.
Discuss efforts related to CAMs with your auditor. The types of questions audit committees may consider asking their auditors include:
- What has the audit firm done to prepare for the identification and communication of CAMs in the auditor’s report?
- Does the audit firm have a methodology, practice aids, or other training available to its auditors?
- Has the audit firm done any dry runs? If so:
  - What did the audit firm learn as a result of the dry runs?
  - Were there any matters considered to be “close calls,” but ultimately not identified as a CAM during the firm’s dry run? What was the thought process behind the final determination?
  - Has the audit team discussed with management how any investor or stakeholder question regarding CAMs will be addressed, and by whom?
  - After seeing a draft of the auditor’s report: Are our CAMs similar or different from our industry peers?
Understand how significant events, such as a cybersecurity breach, will affect CAMs. As the requirements for determining CAMs are principles-based, auditors’ application of the requirements will depend on the facts and circumstances of each audit. Events such as cybersecurity breaches could affect the financial statements and become the subject of communications between the auditor and the audit committee. When auditors evaluate such events while determining CAMs, they will consider the impact the event had on the audit. This will largely depend on the nature and extent of the audit response required to address any affected accounts and/or disclosures.
Consider how your shareholders may view CAMs. As this is the first time the US capital markets will see CAMs in auditors’ reports, it would not be surprising if investors had questions about them and their significance. One question the PCAOB staff has addressed in the Investor Insights resource is whether the communication of a CAM is indicative of a misstatement in the financial statements or a deficiency in management’s process. CAMs are intended to provide additional information to investors and other financial statement users about matters arising from the audit of the company’s financial statements. They are not necessarily meant to reflect negatively on the company, nor do they necessarily indicate that the auditor found a misstatement in the financial statements or deficiencies in internal control over financial reporting. A CAM also does not alter the auditor’s opinion on the financial statements, and the auditor is not providing a separate opinion on the CAM or on the accounts or disclosures to which they relate.
Let us know what you think. The PCAOB will perform an interim analysis of the implementation of the standard to assess stakeholders’ experiences and results. The staff will engage with auditors, investors, financial statement preparers, and audit committee members to learn about stakeholders’ experience with CAMs. If you would like to provide feedback on CAMs, please feel free to contact me.

For additional information on the implementation of critical audit matters, visit the PCAOB’s New Auditor’s Report resource page and our July 2019 Insights for Audit Committees: Critical Audit Matters.

Erin Dwyer is the stakeholder liaison and deputy director of external affairs at the Public Company Accounting Oversight Board (PCAOB). The views expressed here are her own and do not necessarily reflect the views of the PCAOB board, any board member, or PCAOB staff.

Erin Dwyer

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