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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 the 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.
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 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 involves 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 judgment, the auditor should take account, alone or in combination, the following factors, as well as other factors specific to the audit:
The most frequently communicated audit CAMs are Goodwill & Other Intangible Assets, Revenue Recognition, Taxes, and Business Combinations.
Audit period covered by CAMs
CAMs are required to audit the current financial statements only. The auditor shall communicate CAMs relating to a prior period as well in certain circumstances like:
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 needed. 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.
When the current period’s financial statements are presented on a comparative basis with those of one or more prior periods, the auditor may communicate critical audit matters relating to a prior period. This may be appropriate, for example, when (1) the prior period’s financial statements are made public for the first time, such as in an initial public offering, or (2) issuing an auditor’s report on the prior period’s financial statements because the previously issued auditor’s report could no longer be relied upon.
The following language, including the section titled “Critical Audit Matters,” should precede critical audit matters communicated in the auditor’s report:
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
If the auditor communicates critical audit matters for prior periods, the language preceding the critical audit matters should be modified to indicate the periods to which the critical audit matters relate.
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 to 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, but other matters may require more extensive documentation.
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.
Mercurius is registered with PCAOB, USA, and has assisted its clients with providing audit and assurance services for over a decade to various clients in the United States, including broker-dealers, S-1, F-1, and Reg-A, 10K, 10Q. We conduct audits for all types of firms registered in the United States or would like to register over there.
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