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The new requirement for auditors to report critical audit matters (CAMs) is the most significant change to the auditor’s report by the Public Company Accounting Oversight Board (PCAOB) in United States via its new standard AS 3101. The determination of CAMs is principles-based and depends on the facts and circumstances of each audit. To date, only a limited number of audits have been subject to the CAM requirements. The second effective date, which impacts audits of all other companies to which the requirements apply is for audits of fiscal years ending on or after December 15, 2020.
What is a CAM?
A CAM is any matter arising from the audit of a company’s financial statements that meets all of the following criteria:
A CAM may relate to a component of a material account or disclosure and does not necessarily have the need to correspond to the entire account or disclosure in the financial statements. A CAM can also be pervasive and relate to many accounts or disclosures. A matter that does not relate to a material account or disclosure cannot be a CAM.
The standard provides a list of factors for the auditor to take into account when determining whether a matter involved especially challenging, subjective, or complex auditor judgment. “Especially” is intended to convey that the matters are assessed on a relative basis within the specific audit and there could be multiple CAMs. CAMs are intended to enhance the auditor’s report to provide audit-specific information that is meaningful to investors and other financial statement users.
CAM Factors
The number of CAMs should be identified, audit by audit, based on the facts and circumstances of each audit. In determining whether a matter involved especially challenging, subjective, or complex auditor judgement, the auditor should take account, alone or in combination, the following factors, as well as other factors specific to the audit:
Most frequently communicated audit CAMs are Goodwill & Other Intangible Assets, Revenue Recognition, Taxes and Business Combinations.
Audit period covered by CAMs
CAMs are required for the audit of the current period financial statements only. The auditor shall communicate CAMs relating to a prior period. For instance:
Communication of CAMs
CAMs are drawn from matters required to be communicated to the audit committee even if not actually communicated and matters actually communicated even if not required. The standard does not exclude any required audit committee communications from the source of CAMs. When communicating CAMs in the auditor’s report, the auditor is required to include introductory language in the “Critical Audit Matters” section of the auditor’s report. For each CAM communicated in the auditor’s report, the auditor has to:
CAMs are intended to enhance the auditor’s report to provide audit-specific information that is meaningful to investors and other financial statement users.
Documentation of CAMs
An auditor must maintain proper documentation for each matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and relates to accounts or disclosures that are material to the financial statements. The auditor must document whether or not the matter was determined to be a critical audit matter and the basis for such determination.
The audit documentation should be in sufficient detail to enable an experienced auditor understand the determinations made to comply with the provisions of AS 3101:
For matters determined to be CAMs, the description in the auditor’s report will generally suffice as documentation and for matters determined not to be CAMs, the amount of documentation required could vary with the circumstances. A single sentence may suffice for some matters and other matters may require more extensive documentation.
Effective dates for CAM requirements
CAM requirements do not apply to the audits of:
Broker-dealers reporting under S-X Rule 17a-5
Auditors of these entities may choose to report CAMs voluntarily.
