Center for Audit Quality issues guide to explain expanded auditor reporting requirements

The Center for Audit Quality (CAQ) on July 24, 2018, published a guide to explain the Public Company Accounting Oversight Board’s (PCAOB) auditor reporting requirements.

The guide is intended to help investors and audit committees better understand the concept of critical audit matters (CAMs), which are a major component of 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.

The PCAOB published Release No. 2017-001 in June 2017 to expand auditor reports beyond the pass-fail model that has been in use for years and provide more insight about what auditors do in scrutinizing their public company clients’ financial statements. The CAMs are matters that auditors felt were especially challenging, subjective, and complex. The CAMs represent issues that are communicated to the audit committee and are related to accounts or disclosures that are material to the financial statements.

According to Release No. 2017-001, the critical matters requirement will apply to audits of year-end 2019 financial statements for large accelerated filers, which are companies with market values of $700 million or more. Smaller companies have an extra year.

To determine whether an issue is a CAM, the CAQ’s 12-page guide said auditors should assess the risks of material misstatement, the degree of auditor judgment for areas such as management estimates, significant unusual transactions, the degree of subjectivity for a certain matter and the evidence the auditor gathered during the review of the financial statements.

The guide also has a section that answers eight frequently asked questions (FAQs).

In addition, the guide provides some information about expanded auditor reporting requirements outside the U.S., including the International Auditing and Assurance Standards Board’s (IAASB) requirement for auditors to describe key audit matters (KAMs). The IAASB defines KAMs as matters that were the most significant during the audit and are selected from matters communicated with those charged with governance.

“The PCAOB has stated, although the processes of identifying these matters vary across jurisdictions, there are commonalities in the underlying criteria regarding matters to be communicated and the communication requirements, such that expanded auditor reporting could result in the communication of many of the same matters under the various approaches,” the CAQ wrote in the guide.

The CAQ added that in order for auditor reports to convey meaningful information and avoid boilerplate language, a regular dialogue among auditors, management, audit committees and others will be critical.


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