You might be aware that external auditors are required to include a discussion of critical audit matters in their audit opinion reports for large accelerated filers for audits of fiscal years ending on or after June 30, 2019, and for other public companies for audits of fiscal years ending on or after December 31, 2020. I expect that CAMs will in some instances present or cause contentions between the external auditor on the one hand, and the audit committee, board, and executive officers on the other hand.
A Critical Audit Matter or CAM is defined as:
Any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee: and that:
- Relates to accounts or disclosures that are material to the financial statements; and
- Involved especially challenging, subjective, or complex auditor judgment.
Thus, based on the above definition, simply determining whether a matter is a CAM could be a challenging issue.
For example, in any given audit situation consider:
-What matters were communicated, or were required to be communicated to the audit committee;
-Relating to accounts or disclosures that are material to the financial statements; and
-Involved especially challenging, subjective, or complex auditor judgment?
I will be discussing the good, the bad, the ugly, and the confusing as this upcoming new area of audit opinion report continues to develop. Auditors and audit committees will need to carefully evaluate what to communicate and what is required to be communicated, materiality (qualitative and quantitative), and whether a matter involves especially challenging, subjective, or complex audit judgment.
For additional help with these issues, the following is a link to a June 24, 2018, release by the Center for Audit Quality entitled Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and other Users of Financial Statements – click on the following link https://www.thecaq.org/critical-audit-matters-key-concepts-and-faqs-audit-committees-investors-and-other-users-financial
Best to you, David Tate, Esq. (and California inactive CPA)