CAQ offers guide to critical audit matters from ‘dry runs’ with PCAOB
The Center for Audit Quality released a new publication Monday to help auditors deal with the critical audit matters section of the audit reports that will soon be required under a new auditing standard from the Public Company Accounting Oversight Board.
Last year, the PCAOB adopted a long-awaited standard for enhancing the usefulness of the auditor’s report by requiring auditors to include a discussion of any critical audit matters, or CAMs, they encountered during their audits. Some of the requirements of the new standard for the auditor’s reporting model have already taken effect, but the CAMs requirements are phased in, starting with audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and for all other companies for fiscal years ending on or after Dec. 15, 2020. The PCAOB has been pilot testing the requirements with some companies in a process known as “dry runs” to see what issues they may be encountering (see PCAOB sees successful ‘dry runs’ of critical audit matter disclosures from companies).
The CAQ’s new publication, Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example, includes early insights from some of those dry runs.
“The updated auditor's report presents an excellent opportunity to enhance transparency and strengthen investor trust,” said CAQ Executive Director Cindy Fornelli in a statement. “Building on the public company auditing profession's proactive engagement around auditor reporting, this publication's insights will be valuable for auditors, audit committees, financial executives, investors and others ahead of important implementation deadlines for critical audit matters in 2019 and 2020."
Some of the main takeaways from CAMs testing so far include:
- Deciding which audit matters qualify as critical involves applying a principles-based approach and significant auditor judgment.
- It’s important for auditors to communicate with company management and the audit committee early and frequently in the process of identifying and drafting CAMs.
- Auditors, preparers, audit committees and others need to plan ahead for the time they will need to determine and write about CAMs.
- Drafting the CAMs discussion can be a challenge.
The CAQ publication provides an illustrative example of a CAM, plus a set of questions to encourage dialogue and understanding about the impact CAMs can have during an audit. The publication is available on the CAQ's resource page for auditor reporting.