On Monday, the PCAOB issued auditor-informed guidance to facilitate implementation of its new auditor report CAM (critical audit matter) requirements in the form of these three documents: (i) "The Basics," (ii) "Staff Observations from Review of Audit Methodologies," and (iii) "A Deeper Dive on the Determination of CAMs." Although logically geared toward auditors, the guidance is also of value to company management, audit committees, and investors.
The high-level overview of the CAM requirements imparted by "The Basics" includes these and other key principles:
- CAM Sources: 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 doesn't exclude any required audit committee communications from the source of CAMs.
- Audit Committee Communications: Any matter that will be disclosed as a CAM should already have been discussed with the audit committee, and - per Paragraph .21 ("The Auditor's Report") of AS 1301: "Communications with Audit Committees" - auditors are required to provide to and discuss with audit committees a draft of their report.
- Sensitive Information: As the auditor determines how best to comply with the CAM disclosure requirements, the auditor could discuss with management and the audit committee the treatment of any sensitive information.
The "Staff Observations" include key observations and associated guidance based on the Staff's review of CAM methodologies, practice aids, training materials, and examples submitted by 10 audit firms that collectively audit approximately 85% of large accelerated filers. Among the key takeaways for companies:
- Although auditors are not expected to provide information about the company that the company has not made "publicly available" 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 (AS 3101 Paragraph .14 Note 2), "publicly available” information includes not only financial statement documentation, but also the company's annual report, press releases, and other public statements.
- Some audit firm methodologies indicated that the auditor would share draft CAMs with audit committees for their review & feedback, which prompted this guidance: "While the auditor is required to provide to and discuss with the audit committee a draft of the auditor’s report and a dialogue regarding CAMs is expected, auditors should remember that CAMs are the responsibility of the auditor—not the audit committee."
The Deeper Dive document includes Staff FAQs that also address - among other topics of interest - variation/consistency of CAM determinations across auditors and year to year; evaluation of significant events or matters such as cyber breaches; and the interaction between CAMs and company disclosures outside the financial statements.
The CAM requirements are effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and for the balance of companies to which the requirements apply for fiscal years ending on or after Dec. 15, 2020.
See also these articles from Journal of Accountancy and the WSJ, and additional information & resources on our PCAOB and Auditing & Audit Firms pages. This post first appeared in the weekly Society Alert!