United States: PCAOB Rules To Require Reporting Of Critical Audit Matters And Enhanced Details In Public Company Audit Reports

Last Updated: November 10 2017
Article by J. Robert Duncan and Joseph V. Moreno

Most Read Contributor in United States, July 2019

Auditors of public companies will be required to move beyond a simple "pass or fail" opinion and include significant new information in audit reports under rules proposed this year by the Public Company Accounting Oversight Board (the "PCAOB")1 and recently approved by the Securities and Exchange Commission (the "SEC").2 The adoption of Auditing Standard No. 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,3 and other related rules updates were the culmination of a six-year effort that represents the most substantial change to auditor reporting requirements since the 1940s, and brings U.S. auditing standards in line with similar standards adopted (i) by the International Auditing and Assurance Standards Board ("IAASB"),4 (ii) in the European Union,5 and (iii) in the United Kingdom.6 The changes, designed by the PCAOB to make audit reports and financial statements more meaningful to investors and the capital markets, are likely to seriously alter the determination among auditors, audit committees, and management about whether and how significant audit issues are identified and addressed, and how such issues will impact a company's public disclosure obligations.

A. Communication of Critical Audit Matters

The most significant impact of the new rules on public companies7 is the requirement that auditors identify and communicate critical audit matters ("CAMs") within their audit report. The new rules do not supply a list of categories or types of CAMs, but instead provides a subjective, auditor-defined standard of "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) relates to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment."

In determining whether an audit issue "involved especially challenging, subjective, or complex auditor judgment," the rules point auditors to several factors, including:

  • 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 effort 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 effort 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; and
  • the nature of audit evidence obtained regarding the matter.

For every matter arising from a financial audit that (a) was communicated or required to be communicated to the audit committee, and (b) 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, and the basis for such determination. Such documentation must be in sufficient detail such that an experienced auditor, with no previous connection with the engagement, could understand the determinations made.8

If an auditor identifies a matter as a CAM, the auditor must include the CAM in the audit report, 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 reference the relevant financial statements or disclosures. Alternately, if an auditor determines during the course of an audit that there are no CAMs, the audit report must contain a statement to that effect.

The new CAMs requirement is, according to SEC Chairman Jay Clayton, a response to investor requests for more specific information about how auditors reach their opinions, and is designed to provide the public with the auditor's perspective on material audit matters discussed with the audit committee.9 The new rules for communication of CAMs go into effect for audits of "large accelerated filers" for fiscal years ending on or after June 30, 2019, and for all other issuers for fiscal years ending on or after December 15, 2020.

B. Other Audit Report Enhancements

In addition, the new rules impose a number of enhancements designed to make audit reports more reliable and user-friendly, including:

  • Communication and Basis of Audit Opinion. The auditor's unqualified opinion (which will retain the existing "pass or fail" determination), along with the basis for that opinion, will appear toward the top of the audit report in the first and second sections, respectively.
  • Disclosure of Auditor Tenure and Independence Statement. The audit report must include statements by the auditor disclosing the year in which it began serving consecutively as the issuer's auditor, and acknowledging the requirement that the auditor maintain its independence.
  • Formatting of Audit Report. Section titles will be clearer and standardized, and certain language describing the auditor's responsibility to obtain reasonable assurance that financial statements are free of material misstatements will be simplified. The final audit report must be addressed to the company's shareholders and board of directors (or equivalents).

These audit report enhancements will go into effect for all audits of fiscal years ending on or after December 15, 2017.

C. Industry Comments and Pushback

The PCAOB's efforts in support of these new auditing standards stretched over six years and generated over fifty comments from investors, public companies, and accounting industry insiders, many of whom advocated against their adoption. The most vigorous arguments raised questions concerning the usefulness of including CAMs in audit reports, and whether the added cost and complexity would result in any added value to users of financial statements or simply would be duplicative of, or in conflict with, management disclosures. Commenters also raised concerns about including subjective auditor positions on CAMs in an audit statement, and the conflict that could result among auditors, audit committees, and management regarding how CAMs were identified and communicated. There were also concerns about whether communications about CAMs could run afoul of accounting industry standards regarding confidential client information, and whether these communications could be the subject of frivolous civil litigation.

D. Conclusion

Despite concerns raised by industry commenters, the SEC's unanimous approval of the new rules indicates an inclination by the current leadership to respond to longstanding calls for greater transparency around the audits of public companies, and an alignment with similar audit standards outside the United States. However, Chair Clayton addressed many of these concerns by asserting in comments that the PCAOB and the SEC would continue to monitor the results of implementation, conduct an analysis under the PCAOB's Post-Implementation Review process, and be open to making future changes if the rules resulted in unintended consequences – all hallmarks of what he characterized as "high-quality regulatory decision-making." Meanwhile, in the time leading up to the effective date, audit firms should prepare for how they intend to work with clients that are subject to the new rules on identifying, discussing, and communicating CAMs. And since the new rules do not include any templates or examples of what a CAM description should look like, there will be a learning curve as to how much detail should be provided to satisfy these new rules in the eyes of the PCAOB.


1 See 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), available at https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf.

2 See SEC Release No. 34-81916, Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules on the Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and Departures from Unqualified Opinions and Other Reporting Circumstances, and Related Amendments to Auditing Standards (Oct. 23, 2017), available at https://www.sec.gov/rules/pcaob/2017/34-81916.pdf.

3 Auditing Standard No. 3101 applies to written audit reports in which the auditor expresses an "unqualified" opinion on the financial statements – i.e., a conclusion that the financial statements, taken as a whole, are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.

4 In September 2014, the IAASB adopted new Auditor Reporting Standards which became effective in December 2016. See International Standard on Auditing 701, Communicating Key Audit Matters in the Independent Auditor's Report, available at https://www.ifac.org/publications-resources/reporting-audited-financial-statements-new-and-revised-auditor-reporting-stan#node-32595.

5 In April 2014, the EU adopted legislation expanding reporting requirements for statutory auditors that were to be adopted by member states no later than June 2016. See Article 10, Audit Report, of Regulation (EU) No 537/2014 of the European Parliament and of the Council (Apr. 16, 2014), available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32014R0537.

6 In April 2016, the UK's Financial Reporting Council incorporated the EU and IAASB requirements relating to key audit matters. See International Standard on Auditing (UK) 701, Communicating Key Audit Matters in the Independent Auditor's Report (June 2016), available at https://www.frc.org.uk/getattachment/b250cf61-407f-4b1e-9f1c-e959174e1426/ISA-(UK)-701_final.pdf.

7 The requirement to communicate CAMs in an audit report does not apply to: (non-issuer) broker-dealers reporting under Rule 17a-5 of the Securities Exchange Act of 1934 (the "Exchange Act"); investment companies (other than business development companies); emerging growth companies as defined by Section 3(a)(80) of the Exchange Act; or employee stock purchase, savings, or similar plans. However, auditors may elect to voluntarily include CAMs in audit reports of such entities.

8 See Auditing Standard No. 1215, Audit Documentation, available at https://pcaobus.org/Standards/Auditing/Pages/AS1215.aspx.

9 See SEC Chairman Jay Clayton Public Statement, Statement on SEC Approval of the PCAOB's New Auditor's Reporting Standard (Oct. 23, 2017), available at https://www.sec.gov/news/public-statement/clayton-statement-pcaob-new-auditor-reporting-standard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions