Tuesday, May 28, 2019

PCAOB issues guidance on CAMs communications as compliance date nears

By Amanda Maine, J.D.

The PCAOB has issued new staff guidance on the communication of critical audit matters in the auditor’s report. The guidance purports to take a “deeper dive” on CAMs, which will be required for audits for fiscal years ending on or after June 30 for large accelerated filers.

New auditor’s reporting model. The PCAOB adopted a new auditor’s reporting model in June 2017 after several years of consideration, input, and roundtables. The new auditing standard requires the auditor to communicate in the auditor's report any critical audit matters (CAMs) arising from the current period’s audit of the financial statements. The Board defined a CAM as a matter communicated to the audit committee or that is required to be communicated to the audit committee that: (1) relates to accounts or disclosures that are material to the financial statements, and (2) involved especially challenging, subjective, or complex auditor judgment. These would be matters that, as explained by several PCAOB officials, “kept the auditor awake at night.”

Provisions of the new auditing standard related to the communication of CAMs will take effect for audits for fiscal years ending on or after June 30, 2019, for large accelerated filers; and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirements apply.

New guidance. With the effective date for CAMs approaching, the PCAOB has issued new guidance on how auditors should communicate CAMs. The guidance refers to the “what” (the identification of a CAM), the “why” (the principal considerations that led the auditor to determine that the matter was critical), the “how” (how the CAM was addressed in the audit), and the “where” (the relevant financial statement accounts or disclosures).

The guidance contains examples to inform auditors how they should describe the principal considerations leading to a CAM determination. Using a goodwill impairment assessment as an example, the guidance recommends the auditor address issues such as what kind of valuation technique was used, if the valuation was based on subjective assumptions (such as revenue projections given a lack of operating history), underlying factors (such as market conditions, product demand, or new regulations), and the nature and extent of specialized knowledge, including using the work of a specialist, in addressing the CAM.

The guidance also describes considerations at play when describing audit procedures as part of communicating how a CAM was addressed in an audit. These might include the degree of auditor judgment involved in evaluating management assumptions, the testing of controls used in addressing risks related to the valuation assertion of assets acquired in an acquisition, and the nature and extent of a specialist’s involvement in performing the audit.

The guidance warns that the language used to describe how a CAM was addressed should not imply that the auditor is providing a separate opinion on the CAM. CAM communications should not simply duplicate public disclosures already made by the company, the guidance states. If a particular CAM is identified over more than one reporting period, the auditor should consider the specific facts and circumstances that existed during the audit when tailoring the communication of the CAM. The guidance also emphasizes that the auditor is not expected to provide information about the company that has not already been disclosed unless that information would be necessary to describe why a matter was considered a CAM.