Critical Audit Matters

Author: Lynn Fountain

The purpose of an external audit is to enhance the intended financial statement user’s degree of confidence. Considering all of the scandals in financial reporting that have occurred in the last 20 years, it is surprising that the auditor’s report has not seen changes earlier. Changes to improve communication to financial statement users has been urged for many years. Even through this urging, amid all of the scandals that occurred in the late 1990 and early 2000’s, changes to the auditor’s report had been minimal until recently.

The purpose of critical audit matters (CAMs) is to provide audit-specific information that is meaningful to investors and other financial statement users about matters that required especially challenging, subjective, or complex auditor judgment. CAMs are determined from matters arising from the audit of the financial statements, and thus are rooted in the financial statements themselves.

So, what exactly is a CAM and how is it identified? Critical audit matters are the backbone of PCAOB Auditing Standard 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. According to the standard, a critical audit matter is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
1. Have been communicated or were required to be communicated to the audit committee. The standard does not exclude any required audit committee communications from the source of CAMs.
2. Relates to accounts or disclosures that are material to the financial statements. CAM is required to relate to accounts or disclosures that are material to the financial statements. 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.
3. Involved especially challenging, subjective, or complex auditor judgment.

The standard specifically states that critical audit matters are not a substitute for the auditor's departure from an unqualified opinion.

Publication Date: July 2019

Designed For
Auditors. CEO’s, CFO’s, Executive Management, Board of Directors and Audit Committee’s, Accountants and Finance professionals, and Legal and Compliance professionals.

Topics Covered

• CAM Definition and Purpose
• Criteria to Determine CAM
• Auditor's Report
• CAM Disclosure Requirement Criteria
• KAM vs. CAM
• Documentation
• Communicating CAM
• CAM Illustrative Example

Learning Objectives

• Identify the PCAOB definition of a critical audit matters (CAM) and apply that understanding to audit issues
• Recognize and explore the purpose for CAMs
• Recognize and apply the separate criteria identified by the PCAOB for determining CAM issues
• Identify how to execute the appropriate methods and documentation for reporting CAMs in the Auditor's report
• Recognize and apply the concepts for proper disclosure of CAM issues
• Describe how to execute appropriate interactions with the audit committee regarding CAMs
• Identify the variances between CAMS and key audit matters (KAMs)
• Recognize the considerations for evaluating whether a CAM applies to a particular company through a case scenario
• Identify the effective date for the large accelerated filers of global standard AS 3101
• Describe what's included in the formal definition of a critical audit matter
• Recognize disclosure requirements of CAM

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Auditing (2 hours)

Program Prerequisites
None

Advance Preparation
None