June 11, 2019
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INVESTOR RESOURCE
Critical Audit Matters
Overview
Beginning in 2019, certain public companies’ audit reports will begin to
contain new information—critical audit matters, commonly referred to
as CAMs. The PCAOB’s standard requiring the auditor to communicate this
new information about the audit is intended to make the auditor’s report
more informative and relevant to investors and other financial statement
users. CAMs are intended to provide tailored information specific to the
audit—from the auditor’s point of view—on matters that require especially
challenging, subjective, or complex auditor judgment. Investors may find
CAM information useful when considered among other information
regarding a company’s financial statements.
Through this resource and other outreach efforts, we aim to provide
investors with useful information regarding changes to the auditor’s
report, frequently asked questions about CAMs, and information about the
implementation of the standard.
Understanding the Auditor’s Report
The auditor’s report, filed with a company’s annual report or registration
statement, is the primary means by which the auditor of a company’s
financial statements communicates information to investors and other
financial statement users. The auditor’s report identifies, among other
things, the financial statements that were audited, describes the nature of
the audit, and presents the auditor’s opinion as to whether the financial
statements present fairly—in all material respects—the financial position,
results of operations, and cash flows of the company in conformity with the
applicable financial reporting framework.
An auditor is required to plan and perform the audit to obtain reasonable
assurance about whether the company’s financial statements are free of
material misstatement whether caused by error or fraud. Once the auditor
completes the audit, the auditor will issue a report containing an opinion
on whether the financial statements are fairly presented. The company
will include that report in its annual report or registration statement filed
with the U.S. Securities and Exchange Commission (SEC).
What’s included?
✓ Overview
✓ Understanding the
Auditor’s Report
✓ The Basics
✓ PCAOB Sta
Responses to FAQs
✓ About the PCAOB
✓ Stay Connected
The Oice of External Aairs has prepared this resource as a service to investors. This resource provides a high-level overview of the new auditor reporting requirements and
sta interpretations based on PCAOB Release No. 2017-001 and related sta guidance. This resource does not constitute rules of the Board, nor has it been approved by the
Board.
Insights for
Investors
Investor Resource: Critical Audit Matters
July 11, 2019
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Recent Changes
In 2017, the PCAOB made significant changes to its auditing standards
related to the form and content of the auditor’s report. The intent of
these changes is to make the report more useful and relevant to investors
and other financial statement users. In addition to the auditor’s opinion,
there are now more required communications to be made by the auditor.
The enhancements to the auditor’s report were designed to be instituted
in phases, the first of which made a number of improvements to clarify
the auditor’s role and responsibilities related to the audit, including
communication of auditor tenure. Those changes took eect for audits of
fiscal years ending on or after December 15, 2017. The second phase
requires auditors to communicate CAMs in order to provide enhanced
information to investors and other financial statement users about the
audit of a company’s financial statements, specifically regarding matters
that required especially challenging, subjective, or complex auditor
judgment, and the auditor’s response to those matters.
The Basics
The PCAOB’s standard requires an auditor to determine CAMs using a
principles-based framework.
CAM Definition
A CAM is any matter arising from the audit of a company’s financial
statements that meets all of the following criteria:
A matter that was communicated or is required to be communicated
to the audit committee;
A matter that relates to accounts or disclosures that are material to
the financial statements; and
A matter that involved especially challenging, subjective, or complex
auditor judgment.
CAM Communication
When an auditor communicates a CAM in the auditor’s report, the auditor is
required to do all of the following:
Identify the CAM;
Describe the principal considerations that led the auditor to
determine that the matter is a CAM;
Describe how the CAM was addressed in the audit; and
Refer to the relevant financial statement accounts or disclosures that
relate to the CAM.
Eective Dates
For audits of large accelerated filers, CAM requirements are eective for
fiscal years ending on or after June 30, 2019. For audits of all other
companies to which they apply, CAM requirements are eective for fiscal
years ending on or aer December 15, 2020.
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July 11, 2019
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Audits that do not require CAMs
CAMs are not required for audits of:
Brokers and dealers reporting under Rule 17a-5 under the Securities
Exchange Act of 1934;
Registered investment companies other than business
development companies;
Employee stock purchase, savings, and similar plans; or
Emerging growth companies.
For additional information, view our Basics document.
PCAOB Sta Responses to FAQs
Through outreach to investors, audit committees, preparers, and other
interested parties, the PCAOB has received a number of questions on
CAMs. Responses from the sta that may be of interest to investors are
included below.
Does the communication of a CAM indicate a
misstatement in the financial statements or
deficiency in management’s process?
CAMs are intended to provide information to investors and other financial
statement users about matters arising from the audit of the company’s
financial statements that required especially challenging, subjective, or
complex auditor judgment, and the auditor’s response to those matters.
CAMs are not necessarily meant to reflect negatively on the company, nor
do they necessarily indicate that the auditor found a misstatement or
deficiencies in internal control over financial reporting. A CAM also does
not alter the auditor’s opinion on the financial statements, and the
auditor is not providing a separate opinion on the CAM or on the accounts
or disclosures to which they relate.
How many CAMs should be communicated?
There is no specific number of CAMs that should be communicated in the
auditor’s report. The number of matters that are reported as CAMs will
depend on the nature and complexity of each company’s audit.
Will CAMs be the same within an industry or could
they vary among companies?
The requirements for determining CAMs are principles-based, and auditors’
application of the requirements depends on the facts and circumstances of
each audit. To that end, the PCAOB standard does not prescribe CAMs for a
particular industry, and some company’s auditors may report no CAMs.
Peer companies’ audits could have similar CAMs or they could be different.
Why the matter is a CAM and how it is addressed could also dier from
audit to audit.
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Are CAMs expected to be the same each year?
There is no expectation that CAMs be the same each year. Each year,
auditors determine and communicate CAMs in connection with the audit
of the company’s financial statements for the current period. Depending
on the circumstances, some matters may be considered CAMs each year,
while others may not.
The first year a company is implementing a new accounting standard is
an example of a circumstance in which a CAM could be identified in only one
year. In year one, auditing the company’s implementation of a new
accounting standard may require especially challenging, subjective, or
complex auditor judgment. This matter, however, may not require the
same level of auditor judgment the next year, or it might be a CAM for
dierent reasons than in the first year of implementation.
If a public company experiences a significant event,
such as a cybersecurity breach, will that be a CAM?
The requirements for determining CAMs are principles-based, and auditors’
application of the requirements depends on the facts and circumstances
of each audit. Events such as cybersecurity breaches could affect the
financial statements and become the subject of communications between
the auditor and the audit committee.
When an auditor evaluates such events for purposes of determining
CAMs, they will consider the impact the event had on the audit. This will
largely depend on the nature and extent of the audit response required to
address any aected accounts and/or disclosures.
What is the relationship between CAMs and a
company’s disclosures regarding critical accounting
estimates?
Critical accounting estimates may overlap with CAMs, but they are not
the same. Under SEC interpretation, companies should provide a
discussion in the Management Discussion and Analysis (MD&A) about
critical accounting estimates and assumptions where:
The nature of the estimates or assumptions is material because of
the levels of subjectivity and judgment needed to account for
matters that are highly uncertain or susceptible to change; and
The eect of the estimates and assumptions is material to the
financial statements.
While some critical accounting estimates or components of those
estimates may be the subject of a CAM, not all necessarily will. Further,
the source of CAMs is broader than just critical accounting estimates
because the source of CAMs includes all matters communicated or
required to be communicated to the audit committee.
Do management and the audit committee review and
approve CAMs?
No. While the auditor is required to share the draft auditor’s report
including any CAMs identified with the audit committee, CAMs are the
Investor Resource: Critical Audit Matters
July 11, 2019
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sole responsibility of the auditor. The standard is designed to elicit more
information about the audit directly from the auditor. As the auditor
determines how best to comply with the communication requirements, the
auditor could discuss with management and the audit committee the
treatment of any sensitive information.
What is the interaction between CAMs and company
disclosures outside of the financial statements?
When communicating CAMs, auditors are required to refer to the relevant
financial statement accounts or disclosures rather than to disclosures
outside of the financial statements. Company disclosures outside of
the financial statements may, however, be relevant in the context of CAM
communication.
When describing CAMs in the auditor’s report, the auditor is generally not
expected to provide information about the company that has not been
made publicly available by the company. Such information, however,
may be necessary to describe the principal considerations that led the
auditor to determine that a matter is a CAM or how the matter was
addressed in the audit. Information a company has made publicly
available includes all means of public communication, whether within or
outside the financial statements, including SEC filings, press releases, and
other public statements.
Are CAMs the same as Key Audit Matters (KAMs)?
While both the PCAOB’s requirement and the International Auditing and
Assurance Standards Board (IAASB)’s standard use auditor
communications with the audit committee as the starting point for sources
of communications, the underlying requirements are dierent:
KAMs focus on matters that were of most significance during the
audit.
CAMs focus on matters involving especially challenging, subjective, or
complex auditor judgment related to accounts or disclosures that are
material to the financial statements.
Due to the dierences in definition and underlying requirements, it is
possible that dierences could result in the matters identified or how
matters are described in the auditor’s report. However, it is also possible that
many of the same matters could be communicated under both approaches.
What are the PCAOB’s next steps on CAMs?
The PCAOB will monitor and analyze implementation through three primary
channels and consider whether any additional guidance might
be needed:
1. Stakeholder feedback. Once the initial implementation of CAMs
begins in June 2019, the PCAOB will perform an interim analysis on the
implementation of the standard to assess stakeholders’ experiences and
results. The staff will engage with stakeholders, including auditors,
investors, financial statement preparers, and audit committee members,
through interviews, surveys and other outreach to learn about
stakeholders’ experience with CAMs.
If you would like to be contacted to provide feedback on CAMs, please
contact our Stakeholder Liaison.
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July 11, 2019
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2. Compliance and inspections. We will promote compliance through
the inspection of audit firms after the changes are implemented.
Inspection teams will have the first opportunity to review CAMs in the
second half of 2019, starting with auditor’s reports of large accelerated
filers subject to the CAM requirements for fiscal years ending on or aer
June 30, 2019. PCAOB staff expects to issue a document outlining
preliminary observations from the initial inspections performed in 2019.
3. Post-implementation review. The PCAOB will conduct a post-
implementation review to analyze the effectiveness of the new
requirements aer a reasonable period of time following the completion
of implementation in December 2020, and reevaluate costs and benefits
of the new standard, including any unintended consequences, to
understand the overall impact on investors, the audit profession, public
companies, and other users of the financial statements.
About the PCAOB
The Public Company Accounting Oversight Board is a nonprofit
corporation established by Congress to oversee the audits of public
companies, brokers, and dealers in order to protect investors and the
public interest by promoting informative, accurate, and independent
audit reports. The PCAOB sets auditing standards for the audits of public
companies, brokers, and dealers and has authority to inspect, investigate,
and discipline registered public accounting firms regarding compliance
with the Sarbanes-Oxley Act of 2002, the rules of the PCAOB and the U.S.
Securities and Exchange Commission, and professional standards.
Stay Connected
The Board is committed to enhancing external engagement with
investors and providing an avenue for ongoing communication. In
addition to this resource on critical audit matters, investors may be
interested in our Form AP overview and AuditorSearch tool. If you have
other topics that you would like more information on, additional questions
regarding our resources or CAMs, or if you are interested in engaging with
the PCAOB, please contact our Stakeholder Liaison, Erin Dwyer.
We want to hear from you
In an eort to continue to improve external communications and provide
information that is timely, relevant, and accessible, we want to hear your
views regarding this document. Please take a few minutes to fill out
our short survey.
Contact Our Stakeholder Liaison
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@PCAOBNews
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