Perspectives

Critical audit matters make their debut!

This issue discusses the critical audit matters (CAMs) that were communicated in auditors’ reports for all large accelerated filers with fiscal years ending June 30, 2019. The CAMs most often identified were related to goodwill and intangible assets, revenue, and income taxes.

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Introduction

The first auditors’ reports with critical audit matters (CAMs) were filed! In auditors’ reports for all large accelerated filers with years ending June 30, 2019, the CAMs most often identified were related to goodwill and intangible assets, revenue, and income taxes, and on average, 1.8 CAMs were communicated.

In 2017, the PCAOB and SEC approved PCAOB Auditing Standard 3101 (the “standard”), which substantially revised the auditor’s reporting model. The most significant change was the requirement for auditors to include CAMs in the auditor’s report. The standard is effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and will become effective for audits of all other companies that are subject to the requirements for fiscal years ending on or after December 15, 2020.

The more commonly identified CAMs are related to accounts or disclosures in which there is a high degree of auditor subjectivity associated with applying audit procedures and evaluating the results of those procedures. However, a CAM could also be identified for an account or disclosure that is especially challenging or complex to audit.

Volume 26, Issue 19 | August 30, 2019

CAM Results for Large Accelerated Filers With Years Ending June 30, 2019

August 29, 2019, was the filing deadline for large accelerated filers with fiscal years ending on June 30, 2019. The chart below summarizes CAMs by account/disclosure from auditors’ reports of all large accelerated filers with years ending June 30, 2019, filed as of August 30, 2019. (See chart in PDF.)

CAM Dry Runs

Over the past year, public accounting firms (including Deloitte) made significant progress toward implementing the standard, including developing tools and guidance as well as performing “dry runs” of the CAM requirements for audits of large accelerated filers. In the dry runs, auditors evaluated matters that might be CAMs, considered how CAMs should be drafted, and discussed potential CAMs with management and audit committees to help them understand and prepare for the CAM requirements before the standard’s effective date. The dry runs also provided opportunities for the identification and assessment of implementation challenges, and sharing the draft CAMs allowed auditors, management, and audit committees to align their expectations, thereby avoiding surprises when the standard became effective.

Lessons learned during the dry runs included the following:

  • Practicing the identification and communication of CAMs allowed auditors to gain valuable experience, resulting in a smoother implementation process.
  • Deciding whether an account or disclosure was a CAM required significant judgment and was specific to the circumstances of each audit. Therefore, what might be a CAM on one audit might not be a CAM on another audit.
  • Communicating CAMs that are easily understood by a broad readership can be challenging. For example, it can be difficult to convey concisely why a matter is a CAM or to summarize the audit procedures performed in a manner that is informative but not overly technical.
  • Sharing draft CAMs with management, audit committees, and legal counsel provided an opportunity to set expectations about CAMs and to reach a common understanding about applying the standard’s requirements and how the implementation process and timing may work.

In general, the dry runs helped auditors, management, and audit committees be better prepared to implement the requirements when they became effective. Deloitte will continue to perform dry runs in connection with the 2019 audits of all other companies that are subject to the CAM requirements.

Looking Ahead

The PCAOB has indicated that once the initial implementation of CAMs begins, the Board will assess stakeholders’ experiences and results and determine whether to take further action. Issuance of auditors’ reports containing CAMs will continue to increase in the coming months. It is imperative that auditors, management, and audit committees maintain a dialogue on CAMs to prepare for this significant new requirement.

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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.

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