PCAOB Provides Guidance on Critical Audit Matters

By Heyward Armstrong, Amy Batten, Alex Bowling and Amanda Keister

Recent Developments

On July 11, 2019, the Public Company Accounting Oversight Board (PCAOB) issued two companion pieces providing "insights" into the PCAOB’s requirements for the presentation of critical audit matters (CAMs) in the auditor’s reports for public companies. One piece, Audit Committee Resource: Critical Audit Matters (July 2019) ("Audit Committee Insights"), is designed to assist audit committees in engaging with their companies’ auditors in connection with the PCAOB’s recently adopted CAM requirements. The second piece, Investor Resource: Critical Audit Matters (July 2019), is designed to provide investors with information regarding the CAM requirements so that they can better understand the financial statements of public companies. Both of these resources, as well as other resources provided by the PCAOB and the Center for Audit Quality (CAQ), will be helpful as management and audit committees of public companies engage with their auditors on these new requirements. This Client Alert focuses on the guidance regarding CAMs that the PCAOB provided to audit committees.


On June 1, 2017, the PCAOB issued PCAOB Release No. 2017-001, pursuant to which it adopted a new auditing standard, AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The PCAOB adopted AS 3101 to improve the usability of auditor’s reports. Among the changes to auditor’s reports required by AS 3101 was the requirement for the auditor to include in its report communication regarding critical audit matters, if any, with respect to the audit of the periods covered by the report. AS 3101 defines a CAM 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: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment." The adoption of AS 3101 marked a significant change from the much more summarized and conclusory auditor’s report format that has been in place for years.

The PCAOB provided a phase-in period for the adoption of the auditor’s report requirements related to CAMs. The CAM requirements are effective for large accelerated filers for audits of fiscal years ending on or after June 30, 2019 and are effective for all other filers for audits of fiscal years ending on or after December 15, 2020, except that the CAM requirements do not apply to emerging growth companies.

Frequently Asked Questions Regarding CAMs

In Audit Committee Insights, the PCAOB clarified the role of the audit committee and the auditor with respect to CAMs, how CAMs are determined and the relationship between CAMs and other disclosures by public companies. This guidance includes answers to the following frequently asked questions identified by the PCAOB and addresses many of the same questions previously identified by the CAQ in its December 2018 publication Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example

Frequently Asked Questions and PCAOB's Responses

Q: Will the new requirement of the auditor to communicate CAMs change required auditor communications?
A: No. Matters constituting CAMs should have been discussed with the audit committee under existing requirements.

Q: Does the audit committee have a role in determining and approving CAM communications?
A: No. That said, we expect that management will engage in dialogue with the auditor regarding CAMs, and as acknowledged by the PCAOB, the auditor may discuss with management and the audit committee the treatment of sensitive information. The CAQ also emphasizes the importance of having frequent communications among the auditor, management and the audit committee regarding the identification and disclosure of CAMs.

Q: Does the communication of a CAM indicate a misstatement in the financial statements or a deficiency in management’s process?
A: Not necessarily. CAMs do not change the unqualified nature of the auditor’s opinion. Instead, CAMs are intended to provide additional information about matters that require challenging, subjective or complex auditor judgment.

Q: How many CAMs should be communicated?
A: There is no specific number required; the number will depend on the complexity of the particular company’s audit.

Q: Are auditors required by the PCAOB to change audit procedures due to new CAM requirements?
A: No, but auditors will be required to appropriately document the basis for determining whether a matter was or was not a CAM.

Q: Will CAMs be the same within an industry or could they vary among companies?
A: Which matters are CAMs for a particular company will depend on the specific facts and circumstances for that company. 

Q: Are CAMs expected to be the same each year?
A: There is no such expectation. For example, in the year a new accounting standard is adopted, the adoption might involve a CAM, but the following year the newly implemented standard might not. 

Q: If a public company experiences a significant event, such as a cybersecurity breach, will that be a CAM?
A: Maybe. Whether there is a CAM would depend primarily on the steps the auditor was required to take to address the accounts and disclosures implicated by the event.

Q: What is the relationship between CAMs and a company’s disclosures regarding critical accounting estimates?
A: There may be overlap between the two, but they are not the same. The source of CAMs is broader than critical accounting estimates.

Q: What is the interaction between CAMs and company disclosures outside of the financial statements?
A: CAMs must refer to financial statement information, not information outside of the financial statements. However, information outside of the financial statements may be relevant to the communication of CAMs; auditors are generally not expected to disclose nonpublic information.

Q: Are CAMs the same as Key Audit Matters (KAMs)?
A: No, but there may be substantial overlap. KAMs focus on the most significant audit matters; CAMs focus on matters involving especially challenging, subjective or complex auditor judgment.

Questions the Audit Committee Should Be Asking the Auditor

The PCAOB identified a number of potential questions an audit committee may want to consider asking the auditor, including the following:

  • What steps has the auditor taken to prepare for the adoption of the CAM requirements?
  • How do our company’s CAMs compare to our peers?
  • What discussions have management and the audit team had regarding how investor or stakeholder questions regarding CAMs will be answered?
  • Has the audit firm performed any “dry runs” (i.e., practicing the identification and drafting of CAMs)? If so, what were the results?

Ideally, the audit committee will ask auditors these questions in advance of the audit for which the CAM requirements first become effective so that there are no surprises.


Although CAMs are the responsibility of the auditor, public company management is responsible for the financial statements, and the audit committee is responsible for overseeing the audit of those financial statements. Therefore, management and the audit committee each have an important—and active—role to play in working with auditors as part of the process of identifying, drafting and ultimately disclosing the company’s CAMs. For large accelerated filers, these requirements are now effective for their next Form 10-K filings. Other filers generally have one more reporting cycle (possibly more for non-calendar year end filers) in which to conduct dry runs to be prepared to go live with CAMs for 2020. Through open and frequent communication with the auditors, audit committees and management can make the most of the available time to ensure as smooth a process as possible and avoid any last minute surprises.

If you have questions regarding the matters discussed in this Client Alert, please contact your Smith Anderson Public Companies group lawyer.


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