Implementation of Critical Audit Matters: The Basics

Sta Guidance

March 18, 2019

STAFF GUIDANCE

Overview

Requirements for auditors to communicate critical audit matters (CAMs) in the auditor’s

report will phase in starting in 2019, based on the PCAOB’s new standard, AS 3101,

The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an

Unqualified Opinion. The determination of CAMs is principles-based and depends on

the facts and circumstances of each audit.

The Board adopted these changes to inform investors and other financial statement

users about significant matters in the audit and how they were addressed. This

document provides a high-level overview of the CAM requirements based on PCAOB

Release No. 2017-001.

What is a CAM?

What’s included?

✓ Overview

✓ What is a CAM?

✓ Communication of CAMs

✓ Required Introductory

Language

✓ Documentation of CAMs

✓ Engagement Quality

Reviewer

✓ Interactions with the

Audit Committee and

Management

✓ CAM Interaction with

Explanatory and

Emphasis Paragraphs

When are CAM

requirements eective?

 Audits of large accelerated

filers: Fiscal years ending on or

aer June 30, 2019.

 Audits of all other companies to

which the requirements apply:

Fiscal years ending on or aer

December 15, 2020.

A CAM 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:

 Relates to accounts or disclosures that are material to the financial

statements; and

 Involved especially challenging, subjective, or complex auditor judgment.

Matters communicated or required to be communicated to the

audit committee

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.

Relates to accounts or disclosures that are material to the

financial statements

A 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.

This guidance was prepared by PCAOB sta to help firms when implementing CAM requirements. This sta guidance document sets forth the sta’s views on issues

related to the implementation of the rules and standards of the PCAOB. It does not constitute rules of the Board, nor has it been approved by the Board. It supplements

PCAOB Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion

and Related Amendments to PCAOB Standards (June 1, 2017).

Implementation of Critical Audit Matters: The Basics

Sta Guidance

March 18, 2019

A CAM may not necessarily relate to a single account or disclosure, but could have a

pervasive eect on the financial statements if it relates to many accounts or disclosures.

A matter that does not relate to a material account or disclosure cannot be a CAM.

Involved especially challenging, subjective, or complex auditor

judgment

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:

 The auditor’s assessment of the risks of material misstatement, including significant risks

 The degree of auditor judgment related to areas in the financial statements that

involved the application of significant judgment or estimation by management,

including estimates with significant measurement uncertainty

 The nature and timing of significant unusual transactions and the extent of audit

eort and judgment related to these transactions

 The degree of auditor subjectivity in applying audit procedures to address the

matter or in evaluating the results of those procedures

 The nature and extent of audit eort required to address the matter, including

the extent of specialized skill or knowledge needed or the nature of consultations

outside the engagement team regarding the matter

 The nature of audit evidence obtained regarding the matter

The auditor should also take into account other factors specific to the audit.

Communication of CAMs

Identify the CAM

For each CAM communicated in the auditor’s report, the auditor is required to identify

the CAM.

Describe the principal considerations that led the auditor to

determine that the matter is a CAM

The description of the principal considerations should be specific to the circumstances

and provide a clear, concise, and understandable discussion of why the matter involved

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 must:

 Identify the CAM;

 Describe the principal considerations that led the auditor to determine that

the matter is a CAM;

 Describe how the CAM was addressed in the audit; and

 Refer to the relevant financial statement accounts or disclosures that relate

to the CAM.

Which audits do not

require CAMs?

CAMs are not required for audits of:

_ Brokers and dealers

_ Registered investment

companies other than business

development companies

_ Employee stock purchase,

savings, and similar plans

_ Emerging growth companies

Auditors may early adopt CAM

requirements or apply them

voluntarily to audits for which they

are not required.

Implementation of Critical Audit Matters: The Basics

Sta Guidance

March 18, 2019

especially challenging, subjective, or complex auditor judgment. The communication

should be tailored to the audit to avoid standardized language and to reflect the

specific circumstances of the matter.

Describe how the CAM was addressed in the audit

In describing how the CAM was addressed in the audit, the auditor may describe any, or

a combination, of the following:

 The auditor’s response or approach that was most relevant to the matter

 A brief overview of the audit procedures performed

 An indication of the outcome of the audit procedures

 Key observations with respect to the matter

When describing CAMs in the auditor’s report, the auditor is not expected to provide

information about the company that has not been made publicly available by the

company unless such information is necessary to describe the principal considerations

that led the auditor to determine that a matter is a CAM or how the matter was

addressed in the audit.

If the auditor chooses to describe audit procedures, the descriptions are expected to

be at a level that investors and other financial statement users would understand. In

addition, the objective is to provide a useful summary, not to detail every aspect of how

the matter was addressed in the audit.

Limiting the use of highly technical accounting and auditing terms in the description

of CAMs, particularly if the auditor chooses to describe audit procedures, may help

financial statement users better understand these matters in relation to the audit of the

financial statements.

Language that could be viewed as disclaiming, qualifying, restricting, or minimizing

the auditor’s responsibility for the CAMs or the auditor’s opinion on the financial

statements is not appropriate and may not be used. The language used to

communicate a CAM should not imply that the auditor is providing a separate opinion

on the CAM or on the accounts or disclosures to which they relate.

Refer to the relevant financial statement accounts or

disclosures that relate to the CAM

For each CAM communicated in the auditor’s report, the auditor is required to refer to

the relevant financial statement accounts or disclosures.

Required Introductory Language

The CAM section of the auditor’s report is required to be titled “Critical Audit Matters.”

When communicating CAMs in the auditor’s report, the following introductory language

is required to be included:

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)

Which audit period is

covered by CAMs?

The standard requires that CAMs

only be communicated for the

current audit period.

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 CAMs relating

to a prior period. This may be

appropriate, for example, when:

 The prior period’s financial

statements are made public

for the first time, such as in an

initial public oering.

 Issuing an auditor’s report on

the prior period’s financial

statements because the pre-

viously issued auditor’s report

could no longer be relied upon.

Implementation of Critical Audit Matters: The Basics

Sta Guidance

March 18, 2019

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 CAMs for prior periods, the introductory language should

be modified to indicate the periods to which the CAMs relate.

If the auditor determines that there are no CAMs, the following language is required:

Critical Audit Matters

Critical audit matters 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. We determined that there are no critical audit matters.

Documentation of CAMs

Consistent with the requirements of AS 1215, Audit Documentation, the audit

documentation is required to be in suicient detail to enable an experienced

auditor, having no previous connection with the engagement, 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 (which,

among other things, must describe the principal considerations that led the

auditor to determine that a matter was a CAM) will generally suice as documentation.

 For matters determined not to be CAMs, the amount of documentation required could

vary with the circumstances. A single sentence may be suicient, for instance, when

the auditor’s documentation prepared in the course of the audit includes suicient

detail about why the matter did not involve especially challenging, subjective, or

complex auditor judgment. Other matters may require more extensive

documentation.

Engagement Quality Reviewer (EQR)

The objective of the EQR is to perform an evaluation of the significant judgments made

by the engagement team and the related conclusions reached in forming the overall

conclusion on the engagement and in preparing the engagement report.

Can an audit have no

CAMs?

The determination of CAMs is based

on the facts and circumstances

of each audit. It is expected that,

in most audits to which the CAM

requirements apply, the auditor

will determine at least one CAM.

However, there also may be audits

in which the auditor determines

there are no CAMs.

For each matter arising from the audit of the financial statements that:

(1) Was communicated or required to be communicated to the audit

committee; and

(2) 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 CAM (i.e., involved especially challenging, subjective, or complex auditor

judgment) and the basis for such determination.

Implementation of Critical Audit Matters: The Basics

Sta Guidance

March 18, 2019

The EQR is required to evaluate the engagement team’s determination,

communication, and documentation of CAMs (see paragraph .10j of AS 1220,

Engagement Quality Review). The documentation requirements for CAMs will facilitate

review by the EQR.

Interactions with the Audit Committee and

Management

Any matter that will be communicated as a CAM should already have been discussed

with the audit committee, and the auditor is required to provide a dra of the auditor’s

report to the audit committee and discuss the dra with them (see paragraph .21 of AS

1301, Communications with Audit Committees).

As the auditor determines how best to comply with the communication requirements,

the auditor could discuss with management and the audit committee the treatment of

any sensitive information.

CAM Interaction with Explanatory and

Emphasis Paragraphs

CAMs and explanatory paragraphs

CAMs are not a substitute for required explanatory paragraphs. There are circumstances

in which the auditor is required to add explanatory language to the auditor’s report,

such as when there is substantial doubt about the company’s ability to continue as

a going concern or a restatement of previously issued financial statements, among

others. There could be situations in which a matter meets the definition of a CAM and

also requires an explanatory paragraph, such as going concern.

For these situations, both the explanatory paragraph and the required communication

regarding the CAM would be provided, by either:

 Including the required communications for a CAM in the explanatory paragraph,

with a cross-reference in the CAM section to the explanatory paragraph, or

 Including both the explanatory paragraph and the CAM communication separately

in the auditor’s report, with a cross-reference between the two sections. When both

an explanatory paragraph and a CAM communication are provided, the CAM

description should not include conditional language that would not be

permissible in the explanatory paragraph (see footnote 5 of AS 2415, Consideration

of an Entity’s Ability to Continue as a Going Concern).

CAMs and emphasis paragraphs

If a matter that the auditor considers emphasizing meets the definition of a CAM, the

auditor would provide the information required for a CAM, and would not be expected

to include an emphasis paragraph in the auditor’s report.

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