Tag: critical audit matters

CAMs may be coming, but in the EU, KAMs have already arrived

As you may recall, auditors of large accelerated filers will be required to report on CAMs—critical audit matters—in their auditor’s reports for fiscal years ending on or after June 30, 2019 and in auditor’s reports for all other companies (except EGCs) to which the requirements apply for fiscal years ending on or after December 15, 2020. (See this PubCo post.) As SEC Commissioner Kara Stein observed in her statement on approval of the new rule, the new “standard marks the first significant change to the auditor’s report in more than 70 years.”  In Europe, a similar concept has been in operation since 2016: “key audit matters.” What has been the experience so far?

PCAOB provides guidance on CAMs

Coming soon to a financial statement near you: CAMs!  Late this summer, in audit reports for large accelerated filers with June 30 fiscal year ends, auditors will begin to disclose “critical audit matters.”  Under the new auditing standard for the auditor’s report (AS 3101), CAMs are defined as “matters 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 especially challenging, subjective, or complex auditor judgment.” Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria.  Compliance will be required for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and for audits of all other companies to which the requirement apply (not EGCs) for fiscal years ending on or after December 15, 2020.  With that in mind,  the PCAOB has released three new documents offering guidance on CAM implementation: The Basics; A Deeper Dive on the Determination of CAMs; and Staff Observations from Review of Audit Methodologies.  (See also thecorporatecounsel.net blog and this article in ComplianceWeek.)

CAQ discusses lessons learned from “dry runs” on critical audit matters and related questions for audit committees

As you may recall, auditors of large accelerated filers will be required to report on CAMs—critical audit matters—in their auditor’s reports for fiscal years ending on or after June 30, 2019 and in auditor’s reports for all other companies (except EGCs) to which the requirements apply for fiscal years ending on or after December 15, 2020. (See this PubCo post.) As SEC Commissioner Kara Stein observed in her statement on approval of the new rule, the new “standard marks the first significant change to the auditor’s report in more than 70 years.” Because the selection of and disclosure regarding CAMs will certainly present a challenge for both auditors and audit committees, auditors have been taking steps to prepare for the coming change, including conducting “dry runs” to get a better handle on how the new CAM disclosures will look and how the process will affect financial reporting. To provide some lessons learned from these early dry runs and enhance the understanding of audit committees, auditors and other participants in the process, the Center for Audit Quality has published Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example.

Should the prospect of CAM disclosures cause audit committees to rethink company disclosures?

What are auditors and audit committees doing to get ready for the impending disclosure of CAMs in audit reports ? You remember that, under AS 3101, the new auditing standard for the auditor’s report, auditors will be required (in 2019 for large accelerated filers and phased in for others) to include a discussion of “critical audit matters,” that is, “matters 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 especially challenging, subjective, or complex auditor judgment.”  (See this PubCo post.) Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. The selection of and disclosure regarding CAMs will certainly present a challenge for both audit committees and auditors.  This article from Compliance Week reports that, beyond that challenge, the prospect of CAM disclosure should precipitate a reassessment by audit committees and companies of related corporate disclosure to ensure that companies stay ahead of the curve.

Report on international disclosure of “key audit matters”

This study conducted by the Association of Chartered Certified Accountants reports on the results of a year of international reporting of “key audit matters,” the International Auditing and Assurance Standards Board’s analog to “critical audit matters” in the U.S.  The study looked at 560 audit reports across 11 countries.  These types of studies may provide some useful insights for companies in the U.S.: disclosure of “critical audit matters” will be required as part of the auditor’s report in the U.S. for audits of fiscal years ending on or after June 30, 2019 (for large accelerated filers) and December 15, 2020 (for all other companies to which the requirements apply). According to the study, financial reporting improved following the adoption of KAMs in 2016. Not only did the disclosures themselves provide better information, but the study saw improvements in governance, audit quality and corporate reporting.

Boilerplate CAMs in auditor’s reports? That would be a bummer, man

In what were surely unprepared remarks to the American Institute of CPAs conference on SEC and PCAOB developments, as reported by Bloomberg BNA, SEC Chair Jay “the Dude” Clayton commented on the impact he expects the new form of auditor’s report could have on his mood: “‘If it results in quality, I’ll be happy….And if it results in boilerplate, I’ll be really bummed out.’”  

CAMs are here! SEC approves new PCAOB standard to enhance auditor’s reports

Yesterday, the SEC approved the PCAOB’s proposed rules requiring changes to the auditor’s report, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, along with related amendments to other auditing standards.  The new auditing standard for the auditor’s report, while retaining the usual pass/fail opinion, will require auditors to include a discussion of “critical audit matters,” that is, “matters 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 especially challenging, subjective, or complex auditor judgment.” The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although at a later phase-in date).  The SEC also determined that the new standard, other than the provisions related to CAMs, will apply to emerging growth companies. As Commissioner Kara Stein observed in her statement, the new “standard marks the first significant change to the auditor’s report in more than 70 years.”