In 2017, the Public Company Accounting Oversight Board (“PCAOB”) adopted a new standard for auditor’s reports that requires a description of critical audit matters (“CAMs”) designed to provide investors with information that relates to accounts or disclosures that are material to a company’s financial statements and involve especially challenging, subjective or complex auditor judgment. The CAM standard will be required for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers.

On December 10, 2018, in anticipation of the implementation of the CAM standard, the Center for Audit Quality released a paper titled “Lessons Learned, Questions to Consider, and an Illustrative Example” highlighting observations made from practice dry runs of the CAM standard. The paper seeks to identify and provide clarity on the numerous factors that can influence an auditor’s CAM decision. The paper reminds audit committees that the determination of CAMs, and resulting disclosure, is not meant to be indistinguishable between companies but rather unique to each particular audit and company. Nonetheless, the following early themes noted in the paper from the practice dry runs should be valuable for audit committee members, auditors and financial executives as compliance becomes mandatory:

  • As the PCAOB standard requires a CAM to be material to a company’s financial statements, a relationship must exist between the CAM communicated in the auditor’s report and the accounts or disclosures in the financial statements to which the CAM relates.
  • An auditor may determine that certain critical accounting estimates or assumptions meet the definition of a CAM. The paper identifies legal contingencies as a critical accounting estimate that may be considered a CAM depending upon the facts and circumstances of the particular audit.
  • Not every significant risk will be subject of a CAM. The paper notes that fraud risks are considered significant but may not involve especially challenging, subjective or complex judgment and therefore may result in a CAM.
  • CAMs are most likely to relate to areas that involve a significant degree of estimation or assumptions that necessitate management judgment. The paper identifies auditing goodwill, impairment, intangible asset impairment, business combinations, aspects of revenue recognition, income taxes and fair valuation of financial instruments as areas that are likely to result in a CAM.
  • Most audits will identify at least one CAM, although the paper notes it is possible that an auditor may determine that no CAMs are present.

A copy of the full paper may be obtained using the below link: https://www.thecaq.org/critical-audit-matters-lessons-learned-questions-consider-and-illustrative-example

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.