There are significant changes coming to the audit reports of most public business entities. The new auditor reporting standard adopted by the Public Company Accounting Oversight Board (“PCAOB”) in June 2017 will make the auditor's report more useful to users of financial statements by requiring additional disclosures about the audit. This new standard, Auditing Standard 3101 (“AS 3101”), represents the most significant change to the auditor’s report in more than 70 years.
AS 3101 requires the communication of critical audit matters (or “CAMs”) to be included in the auditors’ opinion, and will highlight any matters arising during the risk based audit that required challenging, subjective or complex auditor judgment, and detail how the auditor responded to those matters. To satisfy AS 3101, auditors identifying a CAM should consider: their risk assessment; the degree of judgement required; the nature and timing of transactions that are unusual in nature; the amount of effort required to address the matter; and the nature of the audit evidence acquired in relation to the matter.
Generally, a CAM will include those matters that are either required to be communicated or would have been communicated to an entity’s audit committee under prior PCAOB guidance. The auditor has sole responsibility for identifying, defining and communicating CAMs. However, the auditor is required to present the audit opinion, inclusive of CAMs, to an entity’s audit committee prior to rendering the audit opinion.
CAMs will be reported in a section following the Basis for Opinion section in the Auditor’s Report. Each CAM reported will identify:
- The critical audit matter;
- The auditor's considerations leading them to categorize the matter as critical;
- A description of how the matter was addressed during the audit; and
- The relevant accounts and/or disclosures that relate to the identified CAM.
Should the auditor not identify a CAM to report, the auditor would be required to report that there were no CAMs identified during the audit. An auditor not reporting a CAM is expected to be an unusual occurrence.
The reporting of CAMs under AS 3101 is effective for large accelerated filers for fiscal years ending on or after June 30, 2019. All other companies required to include CAMs in their audit reports must do so for fiscal years ending on or after December 15, 2020. Communication of CAMs is not required for audits of brokers and dealers reporting under Rule 17a-5 of the Securities Exchange Act of 1934, registered investment companies, employee stock purchase and savings plans and emerging growth companies.
Public business entities and their audit committees are encouraged to discuss these new reporting requirements with their auditor and to determine how to respond to inquiries from financial statement users about the identified CAMs.
Contact your Friedman relationship partner for more information on the new standard, how to get the most out of your next audit report and how the reporting of CAMs could impact your business.