United States: CAQ Publishes New Resource On Critical Audit Matters

Last Updated: August 7 2018
Article by Cydney Posner

In October 2017, the SEC approved the PCAOB's new auditing standard for the auditor's report, AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which will require auditors to include a discussion of "critical audit matters." Given that, for larger companies, CAM disclosure is almost right around the corner, the Center for Audit Quality has made available this new resource, Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements, to help audit committees, investors and other users of financial statements to better understand the concept of CAMs.

Remember that CAM disclosure is being phased in: the requirement will apply to audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and to audits of all other companies to which the requirements apply for fiscal years ending on or after December 15, 2020. Note that the requirements relating to CAMs do not apply to EGCs.


According to this article from Compliance Week, some auditors are working with audit committees at large accelerated filers to conduct CAM "dry runs" to get a better handle on how the new CAM disclosures will look and how the process will affect financial reporting. To perform these dry runs, some auditors are identifying CAMs using the prior year's audit, actually crafting the disclosures, engaging in discussions with audit committees about the disclosures and creating the supporting documentation. In addition, the practice session is helping to identify the types of controls that need to be developed. A PCAOB representative approved of this "proactive approach" and indicated in the article that the PCAOB expects questions over the summer and "' intends to monitor the results of implementation, including consideration of unintended consequences.'" But if you were thinking—because the adopting release contemplates the possibility—that the auditors might, in some situations, find no CAMs to report, think again. So far, advises one Big Four auditor, every dry run has identified some CAMs to disclose. (See this PubCo post.)

What is a CAM? The auditing standard defines "CAMs" as "matters 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 especially challenging, subjective, or complex auditor judgment." (See this PubCo post.) Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard's criteria. The CAQ notes that the phrase "relate to" in the definition means that, while a matter must relate to a material account or disclosure, it need not "correspond to an entire account or disclosure and therefore can be a component of an account or disclosure that is material to the financial statements." For example, citing the PCAOB release, the CAQ explains that

"if goodwill was material to the financial statements, the auditor's evaluation of the company's goodwill impairment assessment could be a CAM, even if there was no impairment. The CAM would relate to goodwill recorded on the balance sheet and the disclosure in the notes to the financial statements about the company's impairment policy and goodwill. Similarly, a matter may not relate to a single account or disclosure but still could be deemed a CAM because of its pervasive effect on the financial statements. For instance, the auditor's evaluation of the company's ability to continue as a going concern could be a CAM, depending on other facts and circumstances of that specific audit. Alternatively, a potential loss contingency that was communicated to the audit committee—but that was determined to be remote and was not recorded in the financial statements or otherwise disclosed—would not meet the definition of a CAM."

Identifying CAMs. Identification of CAMs will be a principles-based inquiry. Once the auditor identifies a matter communicated or required to be communicated to the audit committee that relates to material accounts or disclosures, the auditor, in determining whether a matter involved especially challenging, subjective or complex auditor judgment, will need to take into account a nonexclusive list of factors, including the following:

  • "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."

Areas of significant risk. Drilling down into the first factor cited, the CAQ says that, while CAMs will often relate to significant risk areas of the audit, the new standard does not provide that a matter determined to be a significant risk would always amount to a CAM (because some significant risks may not involve especially challenging, subjective, or complex auditor judgment). Nor, according to the CAQ, are matters such as material related party transactions necessarily CAMs. Likewise, matters that involve the application of significant judgments or estimates may not be CAMs if they do not relate to material accounts or disclosures.

Significant deficiency in internal control. The CAQ makes clear that, by itself, a significant deficiency in internal control cannot be a CAM because, standing alone, it is not related to an account or disclosure, i.e., internal controls are not themselves accounts or disclosures. A signficant deficiency could, however, "be among the principal considerations that led the auditor to determine a matter is a CAM. For example, if a significant deficiency was among the principal considerations in determining that revenue recognition was a CAM, then the auditor could describe the relevant control-related issues over revenue recognition in the broader context of the CAM without using the term significant deficiency."

Current period. Although financial statements present current periods compared to prior periods, CAMs are required to be identified only for the current audit period. Auditors, may, however, choose to include CAMs for prior periods. In addition, over time, analysts and investors will be able to compare CAMs from prior periods.

CAM Disclosure. The standard for CAMs specifies the introductory language required in the audit report. The required language will expressly state that the communication of CAMs does not alter the auditor's opinion on the financials as a whole, nor is the auditor, by communicating CAMs, providing separate opinions on the CAMs or on the related accounts or disclosures. In addition, the auditor would identify the CAM, describe the principal considerations that led the auditor to determine that the matter is a CAM, describe, in summary fashion, how it was addressed in the audit, and refer to the relevant financial statement accounts and disclosures. The standard describes various alternative approaches to describing how the CAM was addressed.

Original Information. Growing out of a concern that the auditors could become a primary source of a company's financial information, the standard for CAMs provides that 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 critical audit matter or how the matter was addressed in the audit." Auditor reporting of "original information" is not prohibited, but it is limited to "areas uniquely within the perspective of the auditor: describing the principal considerations that led the auditor to determine that the matter is a critical audit matter and how the matter was addressed in the audit." Ultimately, the PCAOB determined that the provision was necessary to ensure that "the fact that management did not provide a disclosure would not prevent the auditor from communicating a critical audit matter."


One consequence of the "dry runs" referenced above has been that audit committees are beginning to consider the impact of CAM disclosures on companies' own disclosures. Why? Because, generally, audit committees much prefer that the company get a jump on the disclosure so that the auditors will not need to resort to the creation of original material and the company can best frame the discussion from its own perspective. After all, no audit committee would be enthusiastic about the prospect of the auditor's sharing with the investing public the concerns that arose in performing the audit or the struggles involved in reaching conclusions about the financials. Although the adopting release suggested that the process would be an iterative one between management and the auditors, time will tell whether, once the auditors have crafted a CAM disclosure, they might just be a bit reluctant to allow much input by audit committees or managements. To best position the company, a former Director of Corp Fin (cited in this article from Compliance Week) advised, audit committee members should be revisiting the company's own disclosures now, as soon as they have an inkling of which CAMs the auditor plans to identify: the "best CAM disclosure...will be one that cross references a disclosure in the financial statements." (See this PubCo post.)

The CAQ resource includes a comparison of the PCAOB standard with the international standard from the IAASB, noting that there are many commonalities in the underlying criteria.


A study conducted by the Association of Chartered Certified Accountants reports on the results of a year of international reporting of "key audit matters," the International Auditing and Assurance Standards Board's analog to "critical audit matters" in the U.S. The study looked at 560 audit reports across 11 countries. According to the study, financial reporting improved following the adoption of KAMs in 2016. Not only did the disclosures themselves provide better information, but the study saw improvements in governance, audit quality and corporate reporting. In addition to providing useful information for investors—the key goal of the change to the audit standard—the analysis also found these key "hidden benefits":

  1. Better governance: "Publication of KAMs has provided new focus for discussions between the auditor and the audit committee. For the first time, there is transparency in the most important audit issues that were discussed between the audit engagement partner and the audit committee. As a result, feedback from audit committee members shows that disclosure of KAMs has resulted in improvements in corporate governance."
  2. Higher audit quality: "The process of reporting outputs from the auditor's reporting to the audit committee appears to have had a positive impact on audit quality. There is, so far, no evidence of that KAMs are being used defensively to reduce the auditor's liability. Indeed, some of the exceptional reporting... comes from audit teams who are prepared to consider complex matters requiring careful judgement and to explain their audit approach to these matters publicly in their audit reports....[Some] auditors suggested that KAMs would have a positive impact on quality, noting that once a matter has been selected as a KAM, audit supervisors will expect to see a commensurate response in the audit file. As well as getting auditors to focus appropriately on issues that are KAMs, it may also encourage auditors to—appropriately—do less work on lesser issues that are not KAMs. This could allow auditors to spend more time on the bigger issues."
  3. Better financial reporting: "There is evidence...that reporting by the auditor in relation to part of the financial statements has, in some cases, led companies to add to the disclosures in the financial statements made in previous years. In this way, KAMs have catalysed better financial reporting."

See this PubCo post.

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