LUTZ BUSINESS INSIGHTS
Identifying CAMs: The New-and-Improved Auditor’s Report
Public company auditors have been conducting test runs to help them add critical audit matters (CAMs) to the auditor’s report. To comply with this new Public Company Accounting Oversight Board (PCAOB) requirement, the Center for Audit Quality (CAQ) has found that auditors must apply significant judgment and communicate effectively with management and audit committees.
What are CAMs?
PCAOB 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, was published in 2017 to make the report more useful to investors.
The main provision of the rule requires auditors to describe CAMs, which are the most complicated issues that arose during the audit of the company’s financial statements. CAMs are defined as matters that:
- Have been communicated to the audit committee,
- Are related to accounts or disclosures that are material to the financial statements, and
- Require an auditor to make a subjective decision or use complex judgment.
Although auditors may currently report CAMs on a voluntary basis, it will be required for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. Large accelerated filers are public companies with market values of $700 million or more.
Audits of smaller public companies must follow the new rule for fiscal years ending on or after December 15, 2020. In both cases, auditors must identify each CAM, detail the reasons why it was selected and back up their assertions using relevant financial information.
The PCAOB doesn’t provide a list of possible CAMs or prescribe a specific number of CAMs that must be stated in an auditor’s report. In fact, in some audits, it’s possible that an auditor will determine that there are no CAMs to report.
How are CAMs identified and reported?
The new PCAOB rule represents a major change to the brief pass-fail auditor’s report that has prevailed since the 1940s. To get a head start on revising their reports, auditors of some public companies have conducted test runs of the CAM requirement. This has allowed them to practice how to identify and draft CAMs, as well as how to engage with management and audit committees about CAMs, prior to the effective date.
In December 2018, the CAQ, an affiliate of the AICPA, published Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example. The CAQ report presents early lessons from auditors’ test runs. It also provides an illustrative example of a CAM (goodwill impairment) and a set of questions to foster an understanding of the impact that CAMs will have on the audit process.
The CAQ says, “It can be difficult to strike the right balance between the CAM description in the auditor’s report and information in the company’s disclosures, to convey concisely the essence of why a matter is a CAM, and to describe how the CAM was addressed in the audit in a manner that is informative, but not overly technical.”
Among other things, the CAQ advises auditors to communicate with company management and audit committees “early and often” in the process of identifying CAMs. This communication can help management consider the need for modifications to the company’s disclosures in relation to areas likely to be CAMs.
Any modifications to a company’s disclosures should be based on management’s reporting requirements. Modifications also should be independent of the auditor’s identification of CAMs.
Prepare for questions
Once the new auditor’s report goes into effect, investors and other stakeholders are likely to ask questions about CAMs. Companies should be ready to answer these questions. Management can prepare by openly discussing these matters with auditors. In addition to fully understanding why those matters involved especially challenging, subjective or complex auditor judgment, public companies should consider choosing a liaison who can communicate with outside stakeholders to ensure clear, consistent messaging.
©2019 THOMSON REUTERS
Job interviews are typically the first step in the job seeking process and it is important to make a great first impression. However, you (as the candidate) shouldn’t be the only one responding to all the questions…read more
If you’re still doing your accounting on paper, you know how challenging it is to create reports. You might be able to cobble together a simple report using Excel, but even that takes time and skill…read more
Lutz, a Nebraska-based business solutions firm, welcomes Joe Carlson to its Omaha office’s financial division. Joe joins Lutz Financial as a Financial Planner. He is responsible for assisting Lutz Financials’ advisers…read more
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.
13616 California Street, Suite 300
Omaha, NE 68154
747 N Burlington Avenue, Suite 401
Hastings, NE 68901
601 P Street, Suite 103
Lincoln, NE 68508
3320 James Road, Suite 100
Grand Island, NE 68803